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The big divide in retail property spaceBy: Fergus Hicks

 Resurgence within the retail property marketWith economic growth forecast to top 3 per cent for 2014 as a whole, it comes as little surprise that there has been a degree of resurgence within the retail property market.

Retail property remains one of the most attractive sectors to invest in, with retail markets across the UK looking undervalued, according to DTZ’s Fair Value Index.

The Fair Value Index takes into account a number of factors, such as yields and rental growth, to provide an insight into the comparative attractiveness of current property pricing in the UK.

Manchester has topped the list of individual retail markets for value, with property there underpriced by 13.6 per cent. Other regional cities, such as Leeds and Bristol, also provide good value, with expected returns more than sufficient to compensate investors for risk. The only exception to the pattern among the regional cities is Cardiff, which looks overvalued since rents are expected to remain flat in the medium term.

While this paints a largely positive picture for investors, the increasing probability of rising interest rates has the potential to slow the growth and level out the relative value of retail property across the UK.

Rises in interest rates will make property begin to look less attractive on a relative pricing basis compared to other investment options. This will also inevitably lead to consumers being more cautious about taking on more debt in the near future and may affect consumer spending. All eyes are on the Bank of England to see when this will come, but movement before the end of the year is looking increasingly likely.

So what does this mean for the future of retail investment across the UK?

The outlook for regional cities, due to their good value throughout the first half of 2014, is strong in terms of total returns, yield and rental growth. At DTZ, we have used our Fair Value Index to forecast what is likely to happen over the coming years.

Manchester, alongside providing the best value for investors, is also expected to see the strongest returns across the UK, with 8.6 per cent per annum predicted over the next five years. In contrast, London's West End is looking at returns of 1.4 per cent per annum over the same forecast period, impacted by low income returns and negative capital growth as yields increase from their current low levels. Once again, regional cities are expected to deliver strong returns across the board, with Leeds and Newcastle expected to deliver 7.9 per cent and 5.8 per cent per annum respectively.

Yields are set to remain at around their current levels until the end of the year, staying steady throughout 2015, and then beginning to rise alongside increasing interest rates and relative pricing.

With the stronger jobs market and low inflation, consumers are feeling more confident about their personal finances, which is stimulating retail sales, leading to UK retail rents being forecast to grow at 3 per cent per annum over the next five years. The average, naturally, is driven up by demand for London West End space, with rents predicted to grow at 4.8 per cent per annum over the 2014-18 period, but Manchester again will perform impressively with an increase of 3.5 per cent over the same forecast period.

The health of the retail sector and the north-south divide

Another aspect of the retail space we assess at DTZ is the ‘health’ of the market, taking into account economic data, socio-demographic characteristics of the places in question and retail property information to allow effective comparisons to be drawn between areas across the UK.

Predictably, a majority of the healthy retail locations identified are in the South East, with Surrey, Oxfordshire, Brighton and Hove and West London making up four of the five top spots. This is the effect of the economic recovery stimulating consumer spending in the region. The other end of the chart is populated by areas in the North, such as Blackpool, Kingston-upon-Hull and Angus and Dundee.

This north-south divide, while evident, is set to narrow. The broadening economic recovery will affect owners’ and occupiers’ appetite for regional assets, bringing the two extremes closer together.

This is evident in our future-looking Retail Property Health Index, which highlights potential ‘hotspots’ based on an expected increase in retail sales, falling vacancy rates and rental growth. Interestingly our analysis has pinpointed Berkshire, Cheshire, Worcestershire, Northamptonshire and Shropshire as regions to watch for the future – a departure from the South East dominance we see currently.

Nonetheless, the progress will not be instant. DTZ has forecasted that 2019 will still see dominance from the South East in terms of retail health. The likely top five areas include Inner London, Surrey, Outer London and Oxfordshire, with Solihull being the only location from outside the South East area.

About the author

Fergus Hicks, DTZFergus Hicks is the Global Head of Forecasting at DTZ.

Features September 2014

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