Strong Finish To The Year For Prime Real Estate

3 Dec, 2010, London

Real estate is enjoying a strong finish to the year, with the focus still very much on the best space by occupiers and investors, according to Cushman & Wakefield’s latest UK property investment market update. Prime yields edged down 3bp last month to 5.69%, their lowest since May 2008, but while pricing is now largely stable, investor sentiment has continued to improve.

In general, activity levels have also been good in the final quarter although not in all areas of the market as significant variations in supply and also demand continue to exist.

However evidence of an increase in bank controlled stock as well as property from administrations has helped to stimulate interest where pricing is realistic.

Prime values are well supported by the low level of bond yields as well as by ongoing signs of recovery in the occupational market and growing faith that a double dip recession is unlikely for the UK.

Indeed, contrary to some people’s views, prime yields could in fact fall further next year – particularly if investment supply does not increase – but weak secondary stock could see further outward yield movement before investors will recognise there to be sufficient value in that market.

The flaring up of concerns over sovereign debt issues in Europe has added to investors risk aversion in general and will hence keep the focus of many players on prime income producing stock.

Yields on average are still 127bp up on their 2007 lows. More importantly however, while the property premium over bonds has fallen in the last quarter as bond yields have increased, at 236bp the gap is still nearly twice its long-term average.

Lending costs have edged up in tandem with swap rates in recent weeks but the cost of borrowing still remains at a historically low level. The finance market is nonetheless still cautious and lenders selective, with concerns over the rising internal cost of funds due to changing capital adequacy ratios.

Refinancing opportunities are likely to increase next year alongside direct buying opportunities, as the banks – many of whom are still overly exposed to real estate - release stock or encourage more sales and debt restructurings.

David Hutchings, Head of EMEA Research at Cushman & Wakefield said; "Prime yields have clearly stabilised but still look very attractive compared to the low returns offered by government bonds and the pursuit of quality income will continue to pull investors into the UK property market next year. At the same time however, we have not been immune to a renewed aversion of risk as sovereign debt fears have escalated in recent weeks and hence it is vital that the wider investment market continues to have faith that the UK government is bearing down on its own debt problems."

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