Property markets ‘to be overvalued by early 2015’

PROPERTY markets are about to tip from being undervalued to overvalued in the UK, researchers from property giants DTZ warned a Leeds audience yesterday.

Presenting its 2015 Outlook, DTZ’s sector specialists said the most important issue impacting property remains the ongoing ultra-low interest rate environment, which is expected to continue for the rest of this year while inflation remains low. This is especially relevant since DTZ expects more UK property markets to be overvalued than undervalued by early 2015.

This is tracked by its fair value index line which has been heading down, particularly in the last two quarters of 2014.

Ben Clarke, head of UK research at DTZ, said: “The longer the yield spread between property and bonds is, and is expected to be favourable, the further property yields will be compressed. The UK 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% 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.”

The interest rate environment: predictions for UK interest rates

The interest rate environment - predictions for UK interest rates

DTZ revealed that UK commercial property investment reached an all-time high in 2014, with £54.9 billion transacted, with growth driven by regional activity. Last year investment outside of 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.

This was matched by a shift in the destination of overseas investment, mainly from Europe, US and China, with the share going to the regions increasing from 28% to 36% last year. This week, a group of German investors bought the current home of KPMG in Leeds for more than £10m in the region’s first eight-figure property deal of the year.

Greg Davison, investment director at DTZ in Leeds, said: “Looking to the year ahead, we anticipate continued strong investor demand but with a more stable level of supply. 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. Within the industrial market, the short-term picture remains one of restricted supply, which creates a sound argument for steady rental growth.”

DTZ’s office investor scorecard results tracks the performance and attractiveness of the major cities’ property markets. Leeds sits in mid-table, among a group of very similar cities, while London’s rating is distorted by the volume of transactions.

Office investor scorecard results tracks the performance and attractiveness of the major property markets

The UK regions have been an attractive option, given the higher yields on offer than in London, and with occupier markets underpinned by increasing demand and ongoing limited supply. DTZ also observed a dramatic increase of the flows into domestic retail funds during the second half of 2013 and over 2014, boosting institutional demand.

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