Research published by DTZ has identified the UK’s top three most attractive cities for prime commercial property investment.
Based on comparative property prices for each city in the office, industrial and retail markets, the list pinpoints those cities most likely to provide the best returns for investors looking to enter the market now, and shows the UK regions moving strongly ahead of London as property prices in the capital continue to increase.
Regional markets top the list and in the retail sector Manchester and Leeds offer the biggest opportunities, driven by capital growth as rents rise over the next four years for these two cities. As a result Manchester and Leeds are expected to offer very attractive total returns for the 2014-18 period.
This is echoed by the industrial market in Leeds which is forecast to see the highest rental growth over the forecast period, together with the highest average capital growth.
Greg Davison, DTZ investment director for Leeds, says: “The opportunity to generate above average returns from commercial property within Leeds is largely unique within the UK insofar as it occurs across all of the key market sectors. Backed up by the strong local economic growth outlook and market restrictions, due to a limited development pipeline, Leeds offers investors a compelling story.
“We have started to see yield compression take hold for prime assets through pricing readjustment and in anticipation of rental growth for which there is now real evidence, born out of a lack of supply and stronger economic outlook. Gaining exposure to the best in class remains difficult but as rental growth gains momentum we expect the performance window to increase beyond just prime property; as ever, it is a question of knowing where the best opportunities lie.”
Fergus Hicks, DTZ’s global head of forecasting, says: “While yields have continued to fall during 2014 and property prices have moved from being undervalued to more fairly valued, there are still many regional markets in the UK which provide good returns for investors. In fact, apart from Cardiff retail, we think all of the markets outside London are still around or below fair value, making them attractive to investors.
“In London the picture is more mixed. Ultra low yields make London prime retail look overvalued, while we think industrial property is around fair value. However, there are still opportunities in the City, West End and Midtown office markets, which we think are around fair value.”
The findings are based on the DTZ UK Fair Value Index, 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.
In the first quarter of 2014 the UK Fair Value Index fell to 60 from 73 in Q4 2013 as UK regional property market yields declined, following strong investor interest for prime commercial property outside the capital. Over the past six months the UK Fair Value Index has shown its largest fall since the first quarter of 2010 as a result of the recovery in the UK economy and the rise in bond yields. By the end of the year DTZ researchers predict that the UK Fair Value Index will fall below 50.