Secondary property to outperform prime – DTZ
DTZ expects that capital values for UK secondary commercial property, which have been hit hard by the recession, will remain under pressure this year, but will start to recover from 2014 – at which point they are forecast to start to outperform prime property.
As well as the general economic weakness, investors’ risk averson and the tighter credit conditions linked to bank deleveraging are also drivers of the fall in secondary values in recent years, DTZ says. The firm’s head of UK research Ben Burston says investors have been “favouring prime over secondary assets, core over core-plus, London over the regions and indeed the UK over the wider European market”.
He says the forecast recovery in secondary values will initially be driven by a reduction in risk aversion, which will see a narrowing of the gap between secondary and prime yields. The next stage will be a stabilisation of secondary rents, led by the office sector and supported by the strength of the London commercial property market.
DTZ says that following the rise in secondary yields, higher income returns “will more than offset the capital value falls and mean that All Property secondary total returns will turn positive in 2013 (3.6%) after being negative in 2012 (0.7%). Returns will then rise further to 7.4% in 2014 and 10.3% in 2015 as capital values stabilise and then begin to grow.”
Ben Clarke, associate director in UK’s research team, says offices are expected to be the best performing secondary sector, with total returns forecast to be in line with those for prime office space in 2013, while the retail and industrial sectors are expected to lag behind prime until 2014.
DTZ says investors will have a richer set of opportunities as a result, but cautions that they should be selective “as not every asset will share in the gradual recovery story we have outlined”.
