DTZ spots opportunities in UK commercial property

There are attractive opportunities for investment in UK commercial property thanks to rising yields, says DTZ in its latest Fair Value Index report. The index reading for Q1 2012 rose to 65 from 53 in the previous quarter, indicating that the market has continued to become better value.

All 20 of the submarkets covered by the index are rating either Hot or Warm. “Prime property in the UK is providing investors with an attractive proposition in the current economic climate,” DTZ says, “and pricing is the most attractive it has been for investors since mid-2009”. The UK commercial property market is also outperforming the broader European market, which has an index score of 46 for the first quarter.

DTZ has upgraded several of these this quarter, including the market for retail property in Glasgow, which moves to Hot from Warm, and industrial units in Birmingham, also upgraded to Hot from Warm. The market for West End office space has also been upgraded to Hot from Warm, as the outlook for capital growth has strengthened, with values now expected to increase by 20% over the next five years. DTZ has also upgraded the market for Heathrow industrial property to Warm from Cold, and has moved the London Midtown offices market to Hot from Warm.

The market for retail property in Manchester remains at the top of DTZ’s market pricing table, currently 18% underpriced according to the firm’s calculations following a 50bp shift outwards in yields to 5.5%. This market is expected to see the highest average annual rental growth among retail markets during the next five years, at 3.2% per year. DTZ also notes that yields for Edinburgh office property have moved out 25bp to 6.25% over the quarter.

Within the offices sector, DTZ forecasts that the strongest rental growth this year will be in Cardiff office space, at 4.7%, while rents are expected to remain flat for offices in the City of London, Manchester and Glasgow. Over the next five years, the firm expects the West End offices market to show the highest average annual rental growth, at 5.6% pa.

Rental growth for retail properties is forecast to be strongest in Glasgow retail space this year, at 2.2%, with zero growth forecast, by contrast, in Birmingham retail and London’s West End retail properties. Manchester retail property is expected to produce the highest average annual rental growth over the next five years, forecast at 3.2% pa.

Industrial markets are generally expected to experience flat rental growth in 2012, with the exception of industrial property in Dartford (6.3% pa), Northampton industrial units (4.6% pa) and Heathrow industrial property (2.1% pa). Industrial units in Manchester are expected to show the highest average annual rental growth in the medium term, at 2.4%.