DTZ: Regions back in play with cheap stock, steady rents

The price correction allied with stable rental prospects in the North West will spark an increase in investment deals, according to Mike Mitchell, DTZ regional chairman.

Mitchell, pictured, said: "We have seen significant falls in UK property capital values of around 18% since summer 2007 and further falls are anticipated later this year, however, this significant price correction has brought the UK regional markets back into the contemplation of a number of investors who can see value in UK real estate for the first time in several years.

"With prospects for capital growth limited, investor's focus has returned to traditional property fundamentals. Whilst the risk of a further fall in the investment market exists, buyers will look to the strength of the occupational market in assessing their investment purchases."

He added: "In regional markets such as Manchester, we see a far steadier pattern of rental growth, avoiding the boom bust experience of the South East markets. This stability in the occupational markets should provide investors in the North West with some confidence that they will continue to experience rental growth over the medium term."

Manchester office prime rents remained unchanged at £28.50/sq ft during 2007, but strong demand from occupiers for the very best accommodation will apply upward pressure on rents which are expected to reach £30.00/sq ft by the end of the year, DTZ said.

The DTZ report revealed that global direct real estate transactions were down some 50% in Q1 2008, compared to the same time in 2007. In the UK transactions appeared to stabilise in Q1 2008 standing at £7bn, 42% down on Q1 2007. The rapid correction in market pricing has seen all property yields move out by 123bps since the yield low point in April 2007. Whilst foreign based investors, notably German funds, Sovereign wealth funds and private equity are now showing interest in the UK market.

Mitchell added: "There have been some notable deals already in 2008. Three Hardman Square, comprising 100,000 sq ft of Grade A accommodation in Spinningfields, let to Halliwells solicitors, was sold in January to Credit Suisse for £95m reflecting a net initial yield of 5.36%. Local investors [Bruntwood] picked up Bridgewater House, a multi-let building comprising 180,000 sq ft of accommodation in February for £28.2m, reflecting a net initial yield of 6.48%, and Arkwright House [bought by Wrather Group], a listed multi-let building comprising 85,000 sq ft of accommodation for £18.5m, reflecting a net initial yield of 6%."

DTZ's Investor Intention Survey reveals that 62% of respondents expect to increase funds allocated to real estate in 2008; 44% of respondents confirm that they would be increasing exposure to UK property this year.

However, DTZ warns of a potential disconnect in buyer/seller price expectations, which has left many deals on hold or deferred and suggests unrealistic perceptions will only hold up market liquidity and risk further yield correction.