UK commercial property yield compression to continue in early 2010

8 Jan, 2010, London

Whilst December was the ninth straight month of prime yield compression, the fall was the smallest since July as signs emerged that market pricing was starting to stabilise. In Cushman & Wakefield’s January Business briefing on the UK property investment market, the company says that in December vendors were more willing to take advantage of better demand and pricing - some of whom were selling stock only purchased earlier in 2009.

Cushman & Wakefield’s report shows that prime yields fell 11bp in December ending the year at an average of 6.1% compared to 7.19% in December 2008 and a peak of 7.41% in March 2009.

The report suggests that to date the correction is in the main a return to fair value rather than a bubble – at least where ongoing occupational risks are being fairly assessed. Moreover, with occupier trends showing further signs of steadily firming, the outlook for the early months of 2010 is for yields to move down, albeit with a slowing pace of compression, as seen in December.

The retail market saw the strongest yield compression in December, with an average fall of 20bp, followed by the industrial market at 17bp and offices at 3bp. The recovery since the high point for yields meanwhile has been the strongest for retail warehouses followed by industrial, shops and then national offices. London offices and shopping centres have to date seen a smaller correction, which for the former may reflect the fact that they saw yields increase by less than the market average in the downturn. Shopping centres, however, were most adversely affected than average and yields still stand 225bp higher than their 2007 low, while for the average market the premium is now 167bp.

David Hutchings, head of research at Cushman & Wakefield said: “Investors are becoming less risk-averse as they seek out investment opportunities but most are still chasing prime, well-let assets and, to date, the correction is still a return to fair value rather the start of a new asset price bubble – at least where occupational risks are being fairly assessed. Whilst it is only in isolated areas such as City offices that a return of rental growth is a realistic short-term possibility, with demand generally up as tenants look to take advantage of the deals now on offer, activity is rising, the availability of quality space is falling and incentives are set to reduce in early 2010.”

David Erwin, CEO of capital markets at Cushman & Wakefield said: “Only the very bold expected the market to tighten as rapidly as it did in 2009, with prime headline yields down to 6.1% in December, 132 basis points lower than their peak levels. But there are now signs that the rate of yield compression is easing, helped by an increase in the number of willing vendors we are seeing ready to take advantage of better demand and pricing. Nonetheless, with indications of at least more stability emerging in parts of the prime occupier market, the outlook for the early months of 2010 is for yields to move down further and for the increase in transaction volumes to be sustained. All eyes may be on retailer results in the next 4-6 weeks as a bell-weather for the economy, but it is the banks we should be watching more since they will shape the outlook for investment activity to a large extent. Signs of better financing conditions are set to help the market but the scale of refinancing needs provides both a real threat to the recovery as well as a major source of opportunity for astute investors.”

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