24 May, 2011
- UK invested stock posted 1% growth in 2010. It is projected to grow by 4% in 2011, less than half the global average
- Transaction volumes also showed a turnaround in 2010 with an increase of 46%. They are predicted to rise a further 11% in 2011
- Prime value recovery got ahead of fundamentals, leaving half of the markets now above fair value, with the DTZ Fair Value Index™ score falling to 28
- The UK debt work-out is well underway and moving into its non-prime phase. Sufficient equity is available and new non-bank lending capacity is emerging
- Investors to selectively move into non-prime assets and value-added strategies, as the prime-secondary yield gap is expected to further narrow.
Recovery in the UK property investment market is now a reality, with invested stock increasing by 1% in 2010 and forecast to increase a further 4% in 2011, according to DTZ’s flagship ‘Money into Property 2011’ report. The UK recovery is modest when compared to global invested stock, which increased 3% in 2010 and is forecast to rise by 9% in 2011.
Hans Vrensen, Global Head of Research at DTZ, comments: “2010 saw the first increase in invested stock in the UK since 2007. This followed strong equity growth, which was only partially offset by a decline in private and public debt. UK invested stock is projected to grow by less than half the global average in 2011, on the back of moderate further capital value growth.”
Further evidence of the recovery is seen in transaction volumes which also increased in 2010, by 46% to £33.4bn, and are expected to rise a further 11% in 2011. Greater London volumes accounted for almost half the UK total, reflecting the above-average level of prime stock in the region. This is more in line with global averages. Global volumes increased by 76% in 2010, on the back of record volumes in Asia Pacific, and are forecast to increase a further 9% in 2011.
Hans Vrensen continues: “Transaction volumes returned to their historical average in the UK, reflecting positive investor sentiment and an improving level of liquidity. Transaction volumes are forecast to increase by 11% in 2011, in line with the global average, as more non-prime stock becomes available.”
The significant recovery in UK prime capital values over the last two years was ahead of fundamentals. It has now left the UK less attractively priced than most other markets globally, as indicated by the DTZ Fair Value Index™ score of 28. There are now many more prime markets above fair value than below in the UK. Prime London property continues to offer fair value, with the London City, West End and Midtown office markets, and the West End retail market, currently offering investors adequate risk-adjusted returns, according to the DTZ Fair Value Index™.
The UK score is in stark contrast to the US and Asia Pacific scores of 74 and 65 respectively. Consequently, DTZ expects investors to move into non-prime assets in the UK, and increasingly use value-added investment strategies over the coming year.
Tony McGough, Global Head of Forecasting & Strategy Research at DTZ, comments: “The big opportunity is behind us in UK prime markets. With prime property now fairly priced, investors will begin moving up the risk curve, targeting non-prime, non-core markets for opportunities. This is being facilitated by increased lending, partly from non-banks, and a more stable economy. As the prime recovery extends into secondary markets, investors will need to work secondary assets to improve cash flow and capital value to realise attractive returns.”
The secondary recovery will be further facilitated by lenders as they move into the non-prime phase of their work-out, bringing more stock to the market. 80% of lenders surveyed for Money into Property believe that the working out of loans against prime property is either well underway or already completed. However, just over 50% believe that the working out of loans against secondary property has not yet started. As a result, DTZ forecasts that whilst prime yields will remain flat, the work-out of non-prime debt will result in value recovery in secondary properties.
Martin Davis, Head of UK Research at DTZ comments: “With equity rising and public and private debt falling, deleveraging is well underway. The loan to value ratio has declined by 4% to 63%. The UK has the largest debt funding gap in Europe, which has been a barrier to growth. However, this gap has fallen by 21% from £34bn to £27bn. With lenders’ work-out starting to extend into non-prime assets, investors will be offered more opportunities. As a result, we expect momentum in the market to be maintained in 2011 and beyond.”