UK property markets now offer less attractive returns relatively to investors than they did, with the latest UK all-property DTZ Fair Value Index standing at 33 in the last quarter of 2010 compared to 48 in the previous three-month period.
The index, which offers investors insight into the relative attractiveness of current pricing in UK commercial property markets, reveals that investment prospects have weakened and that the UK currently has limited pockets of attractive investment opportunities.
Manchester offers the best value to investors. Both the Manchester industrial and retail markets are classified as HOT, with solid income return and strong rental growth expected to support values, whilst the Manchester office market is WARM.
Between Q3 and Q4, the categories of eight of the 20 markets covered by the Fair Value Index changed. The Edinburgh offices market was upgraded from COLD to WARM, the two London office markets shifted from HOT to WARM and five markets moved from WARM to COLD.
The main factor which caused markets to be downgraded was an increase in the five-year bond yield, amid increasing fears of the impact of higher inflation and the scope for interest rates to increase sooner than markets had previously expected.
The yield rose from 1.6 per cent in the third quarter of 2010 to 2.2 per cent in quarter four. This raised the risk-adjusted required return. It thus made the expected returns on commercial property, which were unaltered in most markets, relatively less attractive.
The deterioration in the commercial property investment market attractiveness was consequently broad-based, affecting office, retail and industrial property.
George Alcock, investment surveyor at DTZ in Nottingham, said: "In the East Midlands, the Nottingham office market is assessed to be WARM, being appropriately priced and offering investors the prospects of good future performance.
"Indeed, DTZ Research forecasts that Nottingham offices will generate the highest national total return of 8.9 per cent per annum over the period 2011-2015, boosted by strong rental growth forecasts of 2.2 per cent per annum and stable yields of 6.75 per cent.
"As always, however, stock selection will be critical in the future performance, given that it is still possible to do poor deals in a HOT market and great deals in a COLD market. The attractiveness of Nottingham has been demonstrated by the sale of three high-profile prime assets in recent months which have offered strong returns for investors. Where secondary assets have been priced too aggressively, investor appetite has dropped sharply."
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