UK – Total returns for secondary property in the UK are set to start outpacing returns seen in the country’s prime real estate market from next year onwards, according to a report from DTZ.
The total return for secondary market property overall is expected to be 5.1% in 2013, compared with 8.6% for prime, accelerating to 12.1% in 2014 and overtaking prime at 10.1%, the property services company said in a secondary market pricing update report.
Richard Yorke, DTZ’s head of UK research, said: “The overall performance of secondary property is much more sensitive to domestic GDP growth, typically it outperforms prime in periods of economic strength and underperforms in periods of weakness.”
Between 2015 and 2017, DTZ projected that the total return for secondary would remain in double digits while the figures for prime were expected to be around 6-7%.
GDP growth coupled with a greater appetite for risk among investors will narrow the gap between prime and secondary yields after an expected peak in 2013, it said.
This gap, or yield spread, will then narrow by 2017 to levels around those seen in 2008, and this yield compression will generate stronger secondary capital growth, the report said.
But in 2017, secondary capital values are still forecast to be nearly one-third below their peak seen in 2006.
Ben Clarke, the report’s author and associate director in DTZ’s UK research team, said: “A gradual increase in prime yields from 2015, as the current low interest rate environment returns to normal, means, despite the narrowing yield spread, secondary yields are not expected to return to pre-crisis levels.”
Looking ahead, secondary property will still be the clear underperformer compared with prime in terms of rental growth, but the gap is forecast to narrow gradually as secondary rents return to positive growth by 2015, in line with stronger GDP growth, the report said.