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DTZ's Fair Value Index shows Bristol offices market remains warm25th July 2012


Nick Allan, DTZ Bristol


DTZ has published the latest UK all-property DTZ Fair Value Index TM results for Q1 2012. The Index, which offers insight into the relative attractiveness of current pricing in the UK property markets, increased to 65 in the first quarter of 2012 from 53 in Q4 2011. The increased score indicates that the market has continued to become better value.

With all 20 markets in the Index coverage rated either HOT or WARM, prime property in the UK is providing investors with an attractive proposition in the current economic climate, and pricing is the most attractive it has been for investors since mid-2009. The UK is also out-performing the broader European index score of 46.

Ben Burston, Associate Director, Forecasting & Strategy Research at DTZ and author of the report, said: “Our results for this quarter reflect the much wider yield premium offered to property investors in the UK relative to recent experience. This confirms our analysis of the market during much of 2011: that yields in regional markets were a little too low to make them attractive to investors. Now, however, most prime regional UK office markets are trading at yields of 6% and above, ensuring that investors can earn attractive returns relative to other assets.”

There are two drivers behind the upgrading of UK Fair Value estimates over the past two quarters. Firstly, required returns have been impacted by the persistent reduction in bond yields; the UK five year gilt yield has more than halved since mid 2011. The second driver has been an increase in yields in several UK markets. This trend was identified last quarter, and has continued in Q1 2012 with yields in several markets shifting out, including Manchester retail out 50bps to 5.5 per cent and Edinburgh office out 25bps to 6.25 per cent.

Most UK office markets will see an upgrade in average forecast rental growth. The strongest rental growth in 2012 is expected in Cardiff at 4.7 per cent, while rents are expected to remain flat in London City, Manchester and Glasgow.

Nick Allan, Senior Investment Director at DTZ in Bristol said: “DTZ’s Fair Value Report reflects the growing gap between gilt yields and our prime yield for city centre offices. There is also potential for another gap to open in the case of regional offices, between prime, where the benchmark is a 15 year lease on a new building to a high quality covenant, and super prime; which might be 20 or 25 years to an undoubted covenant, such as a government organisation or a FTSE 100 company. This is a feature of the current market where investors continue to seek the safest havens against a backdrop of concern about the performance of regional office markets in terms of rental growth. In addition, we continue to see a record differential between prime and secondary yields, which continues to widen.”

Ben Burston added: “Of the major UK markets included in the Index, many are around Fair Value, meaning their expected returns over the next five years are broadly in line with modest required returns. With the rental growth outlook subdued, capital growth will be limited and income-driven returns of 6 to 7 percent per annum will increasingly be the norm, until a broader economic recovery bolsters occupier demand and provides a driver for rental growth.”

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