DTZ: Manchester leads regional recovery as UK prime picks up

By Helen Roxburgh - Tuesday, August 23, 2011 8:16

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UK prime property is offering better value for investors in the second quarter than in the first quarter of 2011, according to DTZ.

In the DTZ Fair Value Index – in which DTZ grades the relative attractiveness of pricing in the UK property markets - the agent graded the UK industry as 50 points in Q2, up from 28 in Q1 2011.

There has also been a thawing in the UK regional office markets in the last quarter, with Manchester seeing a particularly marked recovery. The upgraded score follows two consecutive quarters of declining scores.

DTZ said the rise in the score reflects the fall in bond yields in core markets - the global fair value score has risen from 50 to 55 points.

DTZ says that bond yields had risen over the six months to the end of Q1 2011, but weakening confidence in the economic outlook has resulted in lower yields, with the UK five-year bond yield currently standing at 1.4%.

It added that although capital growth is expected to be “subdued” in coming years, most retail and office markets are still offering a yield of 5-6% which is substantially above bond yields which were just over 2% at the end of Q2.

Manchester has been upgraded from “warm” to “hot” in the Fair Value Index, and the Newcastle, Manchester, Leeds, Birmingham and Bristol office markets were upgraded from “cold” to “warm”.

Glasgow’s retail and industrial markets went from “cold” to “warm” while the Heathrow industrial market was also upgraded from “cold” to “warm”. A “hot” market means that the expected returns exceed required returns where property is underpriced. A “warm” market means property is appropriately priced, with a “cold” market seeing property as over-priced.

Tony McGough, global head of forecasting & strategy research at DTZ, said: “With bond yields compressing, and increasing stock market volatility, prime property in the UK is now relatively more attractive. It offers higher income yields and a broadly stable capital value outlook going forward.”

Martin Davis, head of UK research at DTZ, added: “While a weaker economic outlook is impacting on occupier demand, the lack of supply at the prime end of the market is expected to keep rents broadly stable, with growth prospects in some markets. This lack of supply can be seen in the London markets where a shortage of prime product both in leasing and investment markets is supporting rental growth and yield compression.”

The European index score rose from 32 to 41 and the Asia Pacific score from 65 to 70, while the US score remained broadly unchanged at 73.

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