Regional markets offer best opportunities for property investment

James Bladon, Associate Director in DTZ’s Investment agency team in Birmingham

Strong investor demand continued to push yields down in quarter two, in 12 out of 32 markets covered, according to DTZ’s UK Fair Value Index™. This is reflected in the UK all property index, which fell nine basis points, from 58 in quarter one, to 47 in quarter two.

While the number of UK commercial property investment opportunities is falling, regional industrial and retail property markets are still attractive, with Manchester retail topping the index. According to the report, Manchester retail is boosted by good rental growth prospects, which will help push capital values higher by 3 per cent per annum over the next five years. Industrial markets from Newcastle, and Glasgow and retail markets from Leeds and Bristol also feature in the top five rankings.

Fergus Hicks, DTZ’s Global Head of Forecasting, said: “Strong investor demand is continuing to fuel investment activity in UK commercial property and yields are falling as a result. While the most attractive opportunities for investors at the moment are in regional retail and industrial markets, we do expect more markets to look fully priced going forward and investors should move now to secure the best opportunities.”

James Bladon, Associate Director in DTZ’s Investment agency team in Birmingham, comments: “The investment markets in the West Midlands mirror the national trend with considerable investor demand but few available opportunities resulting in rising prices.  However, with occupational markets also improving, rents are forecast to grow, which will help boost investment returns. With positive news coming from various directions, Birmingham offices have been a particular target for investors and prices have now reached a level at which DTZ assess the market to be “fully priced”, suggesting that attractive prices are available to sellers.  In contrast, the retail and industrial sectors are assessed to remain “fairly priced”, meaning that purchasers should hit required investment return hurdles.”

Interest rates are expected to rise around the turn of the year and will push gilt yields higher, causing the relative attractiveness of property to deteriorate. As such, DTZ expects the number of attractive investment opportunities to diminish, and the Fair Value Index score to fall as a result.

Ben Clarke, DTZ’s Head of UK Research, said: “At the moment the market is still offering good opportunities for investors, particularly in the regions. However, as interest rates start to rise, which we expect to be around the turn of the year, commercial property pricing will begin to look less attractive and investors will need to look harder to seek out attractive opportunities.”

The Index identifies the most attractive office, retail and industrial markets for prime commercial property investment today on a five year hold period and covers 32 markets. The investment prospects for each market are assessed by comparing the forecast return and risk-adjusted fair/required return. A score of 100 indicates that all markets in the index are underpriced and zero that all markets are fully priced. A score of 50 indicates a balanced number of fully priced and underpriced markets. In Q2, 5 markets were rated as ‘underpriced’, 20 ‘fairly priced’ and 7 as ‘fully priced’.