DTZ

18 November, 2010

The UK all-property DTZ Fair Value Index™, which offers investors insight into the relative attractiveness of current pricing in UK commercial property markets^[1], rose to 48 in Q3 2010 from 38 in Q2, driven by re-pricing in regional office markets. The improvement in the index indicates investment prospects are more attractive now than they were last quarter, when many markets were over-priced. The Q3 score of 48 highlights that the UK has returned to fair value, offering investors adequate returns, with almost as many HOT markets as there are COLD markets.

The improvement in the UK all-property index score has been primarily driven by UK office markets, with the UK office DTZ Fair Value Index™ standing at 42, up from 25 in Q2. This improvement has been particularly evident in the regional office markets, which have re-priced in Q3. Yields in several markets moved out and the majority of regional office markets are now classified as WARM, resulting in higher expected returns for investors than in Q2. These markets include Cardiff, Birmingham, Leeds and Manchester, which have all moved from COLD in Q2 to WARM in Q3, and Nottingham, which retains its WARM classification from last quarter.

London continues to perform well, with London City offices and London West End offices classified as HOT, and London Mid Town offices classified as WARM, in Q3. The London City office market maintains its top-ranking in the UK, although it is less hot than last quarter as prices continue to move upwards. The London West End office market has moved to HOT in Q3 from WARM in Q2. This is due to strong forecast rental growth, despite a relatively low yield (4.5%), with rents forecast to rise to £110 per sq ft by 2014 as a result of a shortage of supply as demand recovers. However, if expected yield compression continues into Q4, this market may only remain HOT in the short term.

Hans Vrensen, Global Head of Research at DTZ, comments: “During Q3 we saw a re-pricing in regional UK office markets, many of which were previously overpriced. Yields had come in too far in relation to expected rental growth, and as a result many markets had overshot fair value and were no longer offering attractive returns for investors. However, the market has responded in Q3 and yields have now moved out to more attractive levels for new investors. Although our rental growth forecasts remain modest and largely unchanged, this yield movement has created more attractive market opportunities. We’re seeing more WARM and HOT markets across the UK than we did last quarter, and overall UK property has now become more attractively priced.”

Although UK office markets now offer more attractive opportunities for investors than they did last quarter, the retail and industrial sectors continue to outperform offices. Of the five COLD markets in the UK, four are office markets. However, the majority of retail and industrial markets are classified as WARM, including the Glasgow retail and industrial markets, Heathrow industrial, Birmingham industrial and London West End retail. The Manchester retail and industrial markets are both classified as HOT in Q3. The Manchester industrial market has seen yields move out to 7.25%, offering a very attractive income return relative to low government bond yields in the UK.

The global DTZ Fair Value Index™ for Q3 2010 stands at 63, well ahead of the UK score of 48. Although the UK has closed the gap on the US (84) and Asia Pacific (65), these regions continue to outperform for investors, ahead of Europe which has an index score of 55.

Tony McGough, Global Head of Forecasting & Strategy Research at DTZ, comments: “The US and Asia Pacific continue to lead the way globally, offering greater prospects for investors, supported by strong economic growth and higher yields. UK investors have experienced strong capital value growth over the past year, and core UK markets are now generally well priced. UK investors will be more reliant on income returns in coming years as capital growth prospects are subdued. However, with pricing having become more attractive across several markets in Q3, the UK investment market now appears more balanced, with many attractive opportunities.”

^[1] See DTZ Foresight, DTZ Fair Value Index™ Methodology, 19 August 2010

About DTZ Fair Value Index™ Methodology

The Fair Value Index measures the overall number of over or underpriced commercial real estate markets within a specified region. Markets are categorised as follows:

• HOT: expected returns exceed required returns. Property is under-priced and these markets offer attractive buying opportunities to investors
• WARM: expected returns are approximately equal to required returns. Property is appropriately priced and investors can earn adequate returns in these markets
• COLD: expected returns are below required returns. Property is over-priced and investors should avoid these markets

Please see DTZ Foresight, DTZ Fair Value Index™ Methodology, 19 August 2010 for more detail.