Secondary property the biggest earner of 2014

Secondary commercial property markets will outperform primary markets in 2014, according to the latest report from real estate services company DTZ.

Historically, there has been strong correlation between primary and secondary commercial property values, until the advent of the financial crisis diverged the correlation into polarised markets just five years ago.

BNP Paribas Real Estate recently released a report forecasting a continuation of this trend throughout 2013, with prime stock retail rents rising and secondary market rates continuing to fall throughout the year.

The prediction seems to contradict with DTZ’s commercial property performance forecast for 2014, and raises questions over how a struggling market can overtake an established region in such a short space of time, as well as whether there will be any correlation between the two.

[caption id="attachment_3586" align="alignleft" width="388"] Total return, 2011-2016[/caption]

One possible answer comes from the projected recovery of secondary commercial property values in 2013, driven by a fall in risk aversion that will narrow the spread of secondary yields within prime markets.

Another comes from a drop in secondary values creating a richer set of opportunities for investors, who will be undoubtedly buoyed by the optimistic secondary yield return predictions in 2014 by DTZ.

In their report, DTZ point correctly to the unrecovered secondary rental rates in 2013 as a means of returning to growth, as well as rising yields on property sales within the band.

Commenting further DTZ said: “We expect values of both prime and secondary to stabilise in 2014, but secondary returns will begin to outperform prime due to higher income return.”

On secondary market pricing, DTZ said office rental growth will recover the fastest, substantially quicker than other sectors; an idea supported by the market performance of Central London.