Research published today by DTZ identifies the UK’s current top three most attractive markets for prime commercial property investment.
Based on comparative property prices for each city in the office, industrial and retail markets, the list pinpoints those markets across the UK most likely to provide the best returns for investors looking to enter the market now. At present, UK regions are more attractive than London, although the flow of investor cash beyond the capital is already impacting the returns available to investors and resulting in changes since Q1.
Bruce Poizer, Senior Director and Head of DTZ Manchester’s investment team comments: “Regional cities are forecast to deliver the highest returns across all sectors, with Manchester topping the retail sector. Manchester currently benefits from higher income yields which boost total expected returns. This factor combined with a strengthening of retailer and leisure demand in the city means that retail investments are expected to outperform.
“Since Q1, DTZ has downgraded Manchester offices from ‘Hot’ to ‘Warm’ which reflects the recent increases in value resulting from strong investor demand. This means that they are no longer underpriced by at least 5% below fair market value. On the flip side this market still looks more attractive to investors than those in the South East.
“Industrial is also a standout sector, benefitting from a higher income yield compared to retail and offices. All 10 of the UK’s industrial markets are currently rated around or below fair value.”
Leeds retains two of the top three markets with its industrial and retail property underpriced by 11.8% and 11.1% respectively. Nottingham is the most underpriced UK office market at 9%, which makes it the fourth most attractive individual market.
Since Q1, DTZ has downgraded three markets – Leeds offices, Manchester offices and Newcastle retail – to reflect that these are no longer underpriced by at least 5% below fair market value. On the flip side, three markets look more attractive to investors now than in Q1 and DTZ has reclassified London City offices, Cardiff industrial and Glasgow industrial as underpriced.
Richard Yorke, Head of UK Research, said: “All eyes are on the Bank of England to see when the first interest rate rise will come, with movement before the year-end looking more likely. We therefore expect the UK property market to present fewer attractive opportunities over the next 18 months. This reflects regional markets becoming fully priced as property yields reach their low points in the cycle, while interest rates rising will push bond yields higher. This will result in property being less attractive on a relative pricing basis compared to other investment options.”
The findings are based on the DTZ UK Fair Value IndexTM, which provides a quarterly insight into the comparative attractiveness of current property pricing in the UK. A score of 100 indicates that all markets are underpriced and zero that all markets are overpriced. A score of 50 indicates fair value. Of the 32 markets covered in Q2 2014, 11 were rated Hot, 19 Warm and 2 Cold.
In the second quarter of 2014 the UK Fair Value IndexTM stayed unchanged at 64, showing the UK continues to offer attractive investment opportunities. DTZ researchers predict that the UK Fair Value Index will fall below 50 by the end of the year.