Pictured above: Nick Allan, Senior Investment Director for the Midlands and South West

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. 

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 ValueTM score of 28, i.e. equity injections are well ahead of the occupier recovery.

Nick Allan, Senior Investment Director at DTZ for the midlands and south west, 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. That said, there have been a number of examples, albeit limited within the Midlands arena where banks have got involved with such assets as Baskerville House in Birmingham and it will be interesting to monitor their asset management strategies including exit strategies.

Nick Allan continued: "Supporting a major conclusion of the Money into Property report, activity in the secondary markets is increasing, with opportunistic investors, many who raised funds some time ago, keen to invest. More properties have become available as lenders start to take action on defaulted loans. For example, at the end of 2010 Saltley Business Park was sold on behalf of the Lloyds Banking Group for £23.285m (a yield of 9.49%), while Wellesbourne Distribution Park is currently being marketed, also on behalf of Lloyds for £21.5m (9.8%). Lenders are not always opting for an immediate sale however, with the administrator/receiver of both Baskerville House and Centre City in Birmingham choosing to undertake asset management initiatives prior to selling in order to increase the price.

"It is not only lenders selling in today's market. Other investors are now disposing of assets, often at the end of a fixed investment period/business plan or to rebalance a portfolio. For example, DTZ advised on the successful sale of One Victoria Square, a prominent office building in Birmingham, at the end of 2010 for £17.5 m."

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."

This sentiment is reflected in BDO's Real Estate Private Equity Survey, published in March, which saw an increasing appetite for property in niche asset classes or away from prime locations as investors go in pursuit of better returns. 

Solly Benaim, Head of Real Estate and Construction at BDO LLP, comments: "Current trends suggest that the prime market is of little value to funds who are having to look farther afield for value creating opportunities - we have witnessed substantial deals already this year in regional retail centres and accommodation for military personnel. For those who still favour prime locations, investors are looking at a wider range of asset classes such as hotels, healthcare and student accommodation which have good potential for growth where portfolios may offer advantages of scale." 

DTZ's Money into Property report will be presented as part of 'The Property Debate', sponsored by BDO, on Tuesday 14 June at Austin Court in Birmingham city centre. For more information and to register attendance, please visit: www.dtzregister.com/mip