Further yield compression in UK regional property markets is making it increasingly hard for investors to find excess returns on UK property. The DTZ Fair Value Index™ for the UK fell to 60 this quarter from 73 in Q4 (a score of 100 indicates that all markets are underpriced and zero that all markets are overpriced). Over the past six months the UK Fair Value IndexTM has shown its largest fall since the first quarter of 2010.
We expect investor demand to remain buoyant in the near term as buyers continue to look for opportunities outside of London. Indeed, we think 11 of the 12 markets outside of London are around or below fair value, making them attractive to investors.
The UK economy has experienced a strong bounce back and growth is expected to top 3% this year. Against this backdrop interest rates are likely to rise in 2015, which will push bond yields higher. As bond yields rise property will look less attractive in comparison. We expect opportunities to earn excess returns will recede further as the year progresses and that the UK Fair Value index will fall below 50 by the end of the year. Investors will increasingly look to other European markets for investment opportunities.
This quarter we have added 12 new UK retail and industrial markets to our forecast and Fair Value coverage, expanding the UK coverage to a total 32 markets. Of the markets added in Q1 we find that six are underpriced, five are around fair value and one is overpriced. Incorporating these markets into the UK Fair Value index sees the score for Q1 rise to 64.
The office and industrial sectors present the most attractive opportunities to investors, with index scores of 67 and 65 respectively. The retail sector, on the other hand is less attractive, with an index score of 60.
Source : DTZ (Groupe UGL)