Economic outlook dampens rental growth, but opportunities remain – DTZ
The outlook for the UK commercial property market has become more challenging during the past quarter, says DTZ, with fewer attractive investment opportunities on offer. The firm’s Fair Value Index for the UK has fallen to 33 for the third quarter, from 50 in Q2, reflecting the deterioration in the economic outlook.
However, while the overall index score has declined, DTZ says UK property continues to offer ‘solid’ income returns, with more than half of the 20 UK markets it surveys classed as Hot or Warm. These include the markets for Leeds office space and offices in London’s West End; the Manchester and West End retail markets; and the markets for industrial property in Manchester and Birmingham.
DTZ says the only market rated as Hot this quarter is the market for retail property in Manchester, thanks to the strong outlook for rental growth there. Elsewhere, reduced rental growth expectations and uplifts in market pricing during the quarter have led to the downgrade of one market from Hot to Warm and five others from Warm to Cold. Markets with reduced rental growth forecasts include Heathrow industrial, Glasgow retail and Edinburgh offices.
The markets for office space in Bristol and offices in Cardiff have been downgraded to Cold from Warm as a result of yields moving in to 6% and 6.25% respectively, and reduced rental growth forecasts. By contrast, the recent movement towards higher yields in Leeds and Newcastle has supported the firm’s Warm rating for these markets, DTZ adds.
While capital growth is expected to be subdued in coming years, most retail and office markets are trading at yields of around 5%-6%, which DTZ says offers a substantial premium over five-year bond yields at 1.4% at the end of Q3. “The majority of the UK’s markets are priced around fair value, with investment opportunities available across the office, retail and industrial sectors,” the firm notes.
