DTZ talks up prospect of bargains in secondary space

THE WIDENING gap in yields between prime and secondary office space is creating opportunities for investors willing to put money into secondary space, according to DTZ.

Bruce Poizer, an investment director of the firm’s Manchester office, said that a gap in yields between primary and secondary office properties traditionally stood at around four percentage points, reflecting the greater risk of holding secondary properties. In the boom years the gap closed to 2% as easy credit pushed up capital values.

The capital values of prime properties have since fell by as much as 50% since the market’s peak but prime yields have recovered well. Secondary properties have not enjoyed the same yield recovery, though, leading to the gap between prime and secondary yields widening to 5%.

“This is one of the strongest indicators yet that investors may now see value returning to the secondary sector as pricing becomes more realistic by comparison to prime stock,” said Poizer (right).

“Investors are still extremely cautious of void rates and service charge exposure, and the shortage of debt is still acting as a major drag on values for anything other than the strongest of income streams.

“That said, for the right stock, there are potentially significant returns for those who are able to take on additional risk. Since the summer of last year we have seen a number of the opportunity funds taking a more aggressive stance on pricing, especially for some larger multi-let office lots.

“Those with cash available can acquire good quality secondary investments thus benefiting from quite high initial returns, but with the right asset management strategy could profit from an additional positive yield shift at the point of sale.”