A 12-month forecast from one of Britain’s biggest property players has warned that the UK markets “are about to tip from being undervalued to overvalued”.
The prediction comes in DTZ’s 2015 Outlook, which says the single most important issue impacting on this country’s property sector “remains the ongoing ultra-low interest rate environment”. A situation most analysts expect to continue for the rest of the year while inflation remains low.
Experts at the global property services company also claim the anticipated switch from undervalued to overvalued is supported by DTZ’s fair value index, which has been heading down, particularly in the last two quarters of 2014.
“The longer the yield spread between property and bonds is, and is expected to be favourable, the further property yields will be compressed,” explained Ben Clarke, head of UK research at DTZ. “Britain’s all-property total return for 2015 is set to again be a double digit — though we expect it to fall short of 2014’s near-20 per cent return.
“However, front-loading returns in this way comes at the cost of a more painful correction to commercial property down the line when the interest rate environment eventually normalises,” he added.
The 2015 Outlook figures reveal that commercial property investment across the UK reached an all-time high in 2014, with transactions worth almost £55bn being largely driven by regional activity.
Last year investment outside London increased from £25.4bn in 2013 to £34.4bn in 2014, while investment within the capital dropped slightly from £22.3bn to £20.5bn.
Both sets of activity were matched by a shift in the destination of overseas investment — mainly from Europe, the United States and China — with the regional share increasing last year from 28 to 36 per cent.
Greg Davison is investment director at DTZ in Leeds, where last month a group of German investors bought the current Yorkshire headquarters of professional service provider KPMG for more than £10m. It was the region’s first eight-figure property deal of 2015.
“Looking to the year ahead, we anticipate continued strong investor demand but with a more stable level of supply,” Davison suggested. “Whilst there are wider issues to distract investors this year, the requirement to invest will remain and the argument for commercial property compelling, maintaining downward pressure on yields.
“Confidence in occupational markets is a key element and whilst we are seeing an increase in development of prime offices we don’t anticipate it denting confidence,” he said, while adding that: “Within the industrial market, the short-term picture remains one of restricted supply, which creates a sound argument for steady rental growth.”
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