The UK Fair Value Index TM (FVI) score fell slightly again this quarter from 90 to 85. Nevertheless, the UK remains more attractive than Europe as a whole, with 15 of the 20 markets covered being rated as Hot.
Looking forward to the year ahead, however, we project that the UK Fair Value Index will fall rapidly to 43 by Q3 2014. This will be the lowest score for six years, and the number of Cold markets will exceed the number of Hot markets. Moreover, we expect the UK index to keep failing and to plateau at 18 in Q3 2015, with only a small rise thereafter.
The rapid fall in UK Fair Value Index will be due to a combination of:
- Yield compression, because of increased investor appetite, especially for regional assets
- Lower expected returns as regional markets become less-valued, underpinned by improved occupier demand
- Higher required returns caused by rising bond yields, reflecting the quickening and broadening economic recovery
Consequently, we expect a significant change in the attractiveness of UK markets. The number of Hot markets is expected to fall from 15, as of Q3 2013, to just one Manchester retail by Q3 2014. Conversely, the number of Cold markets is set to rise from one to four – London West End retail, London Mid Town and City offices, and Heathrow industrial – over the same period. Similarly, we expected the number of warm markets to increase from four to 15.
Source : DTZ (Groupe UGL)