Non-prime is next frontier for investors: DTZ

Investors seeking to achieve high returns with sufficient deal choice should turn to non-prime assets in the next two years, according to DTZ’s Annual Outlook report.

Many non-core investors who have raised capital are becoming increasingly frustrated with the lack of distressed opportunities, the report says. As a result, lower quality properties are expected to be the next logical step for them to realise excess returns.

Furthermore, rents for Class C offices are forecast to be stronger than for Class A in the next five years. This is partly due to the lower absolute starting point of Class C rents after recent declines or low growth. But it mostly reflects solid demand for space from small and medium -sized enterprises (SME) and limited new supply coming online in this segment of the market.

Following an estimated 4% decline in investment volumes to EUR 108 bn in 2012, DTZ expects investment market conditions to remain tight in 2013 with investors still cautious to move up the risk curve.

However, the continued release of stock by banks should see more product and clarity on pricing, allowing some investors to go beyond prime. This would lead to a recovery in investment activity with volumes rising to EUR 113 bn in 2013 and further growth in 2014 to EUR 118 bn.

Hans Vrensen, global head of research at DTZ and lead author of the report, said: ‘From an investor perspective, we expect no widespread tenant defaults or increasing vacancy rates, as new supply will remain limited. In addition, we suspect occupiers will remain overcautious on expansion and focus on cost savings. Many occupiers are opting to stay put and renegotiate existing leases. This means that property cash flows (including non-prime) are likely to be more stable than feared by many.’