The window of opportunity for investors to access prime property in the UK at attractive prices is closing, according to the UK all-property DTZ Fair Value Index results for Q4 2013.
Heightened investor demand for prime commercial property, coupled with the improving fortunes of the wider economy, has significantly impacted real estate yields, particularly in regional markets where competition for assets is increasingly fierce.
The FVI has dropped from 85 in Q3 2013 to 73 for Q4 2013. This was the third successive quarter in which the UK score has fallen reflecting increasing investor demand for real estate which has pushed property yields lower.
Fergus Hicks, DTZ’s global head of forecasting, says: “Over the course of 2013 we saw investors extending their search for assets beyond the capital due to stiff competition in the London market. This increased investor interest pushed yields in regional markets down, affecting potential returns for future investors. Of the 20 markets we look at in our Fair Value Index, five moved from a position of being underpriced in Q3 last year to being fairly priced in Q4.”
Regional offices are a good example of a market in which investors have sought higher yields from prime property. However, the upturn in competition has impacted overall returns. According to DTZ, in the second half of last year the majority of office markets recorded a 25 basis point fall with some, such as Edinburgh and Glasgow, declining by as many as 75 basis points.
The DTZ UK Fair Value Index score looks set to continue dropping over the next couple of quarters as the weight of institutional money continuing to target investment property in regional markets further compresses yields. The overall index score is expected to fall to 50 by the middle of 2014.
Richard Yorke, head of UK research, says: “The window of opportunity for investors to access prime property in the UK at attractive prices is closing. Strong investor interest pushed yields in regional markets down last year, and we expect further compression this year.
“Moreover, with bond yields set to rise during 2014, property will look less attractive in comparison. Indeed, looking ahead to the second half of the year, we think investment opportunities will have diminished considerably, and that investors will be increasingly focusing on secondary grade product.”
DTZ’s UK Fair Value Index offers quarterly insight into the relative attractiveness of current pricing in the UK property market by grading it with a score between zero and 100, with 100 indicating the market is the most undervalued and Hot for investors and zero indicating that the market is the most overvalued and Cold for investors. A score of 50 indicates fair value.