Research from DTZ today said that falling bond yields had improved the investment prospects for UK property by almost 100%.
The property services firm’s fair value index, which measure the likely future returns from various markets and grades them as being cold, warm or hot, showed that on a relative value basis, the UK investment market had moved from a score of 28 out of 100 to 50 out of 100 in the second quarter of 2011.
Yields had risen over the six months to the end of Q1 2011, but weakening confidence in the economic outlook has resulted in lower bond yields, with the UK five-year bond yield currently standing at 1.4%, DTZ said.
The resultant marked shift downwards in required returns is likely to underscore the appeal of the solid income returns offered by prime property amidst a clouded economic outlook, it added. While capital growth is expected to be subdued in coming years, and there are downside risks, most retail and office markets are trading at yields of around 5-6%. This offers a substantial premium over bond yields, which sat at just over 2% at end Q2, and have since fallen significantly further.
In Q2, the Manchester retail and industrial markets have been upgraded from warm to hot. The Newcastle, Manchester, Leeds, Birmingham and Bristol office markets were upgraded from cold to warm. Glasgow’s retail and industrial markets went from cold to warm while the Heathrow industrial market was also upgraded from cold to warm.
Tony McGough, Global Head of Forecasting & Strategy Research at DTZ said: “With bond yields compressing, and increasing stock market volatility, prime property in the UK is now relatively more attractive. It offers higher income yields and a broadly stable capital value outlook going forward.”