Pictured: George Alcock, Senior Surveyor at DTZ in Nottingham

The UK all-property DTZ Fair Value IndexTM (FVI), which offers insight into the relative attractiveness of current pricing in the UK property markets, dropped from 50 to 33 in Q3 2011. The score indicates that the market outlook has become more challenging this quarter, with fewer attractive investment opportunities in the UK. The drop in the FVI score reflects the deterioration in the economic outlook.

In Q3 2011, six markets shifted category with five moving from WARM to COLD and one from HOT to WARM. There is only one HOT market - Manchester retail - this quarter. The lower index is the aggregate result of several downgrades to rental growth expectations, and uplifts in market pricing in Q3. 

The downward revision to rental growth in several markets, including Heathrow industrial, Glasgow retail and Edinburgh offices, has led to more markets being rated COLD this quarter. The Bristol and Cardiff office markets have been downgraded to COLD from WARM in Q3 due to yields moving in to 6% and 6.25% respectively and reduced rental growth expectations. The change in pricing in these markets is in contrast to the recent movement towards higher yields in Leeds and Newcastle, supporting the WARM rating for these markets. 

Despite the challenging economic environment, the majority of UK markets are still rated as either HOT or WARM owing to solid income returns in a low interest rate environment. These include the Leeds and London West End office markets, the Manchester and London West End retail markets and the Manchester and Birmingham industrial markets. Whilst capital growth is expected to be subdued in coming years, most retail and office markets are trading at yields of around 5-6%, which offers a substantial premium over five-year bond yields at 1.4% at the end of Q3. The majority of the UK's markets are priced around fair value, with investment opportunities available across the office, retail and industrial sectors. 

Tony McGough, Global Head of Forecasting & Strategy Research at DTZ said: "The drop in the index score for the UK reflects the deterioration in the economic outlook, particularly due to the ongoing European debt crisis. This is feeding through to our UK property market outlook via our forecasts for rental growth, which have been downgraded in several markets this quarter. Subdued demand and weaker business sentiment is reducing demand for space, lowering rental growth prospects, and subsequently expected returns, over the forecast period.

"However, while the index score has fallen relative to falling bond yields, property continues to offer solid income returns with over half of the 20 UK markets in our coverage classified at HOT or WARM."

George Alcock, Senior Surveyor at DTZ in Nottingham commented: "The East Midlands market has largely mirrored the national picture with the European debt situation impacting on the availability of prime assets, leading to some downward pressure on occupational demand and rental growth forecasts. Despite this, Nottingham offices in particular, offer good prospects for positive future performance, largely as a result of predicted rental growth which at 1.7% per annum remains the strongest of the regional markets outside of London. With prime yields forecast to remain stable in 2012, Total Returns will be driven primarily by Income Returns. Given pressures on other asset classes, correctly priced commercial property represents an attractive proposition, though stock selection will, as ever, remain key to future performance."

In other regions, Fair Value Index scores have also been downgraded, with the global Fair Value IndexTM score at 47, down from 55 in Q2 2011, and the Asia Pacific score falling from 70 to 58. This reflects the weaker global economic outlook.