The DTZ UK Fair Value IndexTM fell to 73 in Q4 from 85 in Q3. This is a significant drop and brings the pricing of UK property into line with Europe as a whole. This is the third quarter in a row that the UK index score has fallen, reflecting heightened investor demand for UK real estate pushing property yields lower.
Regional office prime yields fell sharply in the second half of 2013, with the majority of office markets recording 25 basis point falls and some, such as Edinburgh and Glasgow, declining by 75 basis points. This sudden yield compression is partly due to the impressive speed of the economic recovery seen in the UK over the last six months, but also investors looking in larger numbers to regional markets for higher yields.
We expect the UK Fair Value IndexTM score to drop sharply over the next couple of quarters as the weight of institutional capital targeting investment property in regional markets pushes yields down further. This means that the opportunity to generate excess returns will diminish as expected returns on property drop going forward. Consequently we expect the UK Fair Value IndexTM to fall to 50 by the middle of the year.
Another factor that will diminish the attractiveness of UK property over the coming years will be rises in bond yields. Bond yields are forecast to increase as interest rates rise and global monetary stimulus is gradually withdrawn. Higher bond yields will push up required returns on property and lessen the attractiveness of UK property markets even further.
Source : DTZ (Groupe UGL)