UK prime commercial property investment market stabilises
3 Jul, 2009, United Kingdom
The UK’s commercial property investment market stabilised further in June according to real estate adviser Cushman & Wakefield’s new Business Briefing. Of its 25 key yield indicators none have risen and six have marginally fallen as the weight of money from mainly overseas investors chases prime UK property assets. A further nine yield indicators are under pressure to fall in the near future.
Although the prime yield outlook is now at its most positive since July 2006, the occupier market remains under pressure.21 of the 25 categories analysed face a weak outlook with unemployment expected to rise further into 2010, limited economic growth expected when the recovery does get underway and consumer spending and business investment likely to fall further in the short term. The retail occupier market in particular is suffering from a polarisation in demand between prime space and secondary, most acutely in northern towns rather than in London and the South East and larger cities generally. Although there is some general consensus that the most significant retail casualties have already fallen, market conditions will remain tough for some time.
Investors in the UK remain risk averse and demand is focused on prime assets. Because of the tight supply of quality space on the market, this supply/demand dichotomy in part explains the correction in prime yields. Although the pressures on occupier markets remain severe, yields offer a significant premium to their long run average while equity and bond yields are below their historic norm. A 270 basis point premium in prime property yields to bond yields is clearly still appealing and investment in prime UK assets is expected to continue to increase. Investment in the key central London market, for example, has already increased by 110% in Q2 with £1.433bn invested against only £679m in Q1.
David Erwin, head of UK capital markets, Cushman & Wakefield, said: “There is no doubt we are experiencing a mini revival in the fortunes of the investment market with yields hardening across several sectors and a surplus of buyers over sellers. The London market is leading the way - we are nearly seeing more distressed purchasers than distressed vendors in that market - and there has been an appreciable strengthening in both retail sectors. The twin factors of an over correction in pricing and more than enough equity to support what is still a relatively low turnover market are fuelling the recovery. Is it sustainable? Time will tell but we always keep a very close weather eye on the occupational markets which are not out of the woods by any means and may have some tough times ahead. Prime property still looks the best bet – now not only defined by location but also by the quality and length of income streams it produces.”
David Hutchings, head of research EMEA, Cushman & Wakefield, said: “Some are questioning whether yields have started to adjust too quickly and with rents falling at a rapid rate in some areas, there is a clear threat that some buyers will misjudge the right pricing to compensate for risks that are still quite high. For prime property with a strong tenant appeal, its getting easier to take a more relaxed view on the sustainability of income given that the UK looks to be heading out of recession at a faster pace than most other markets. However, stabilisation does not mean recovery and a return to economic let alone rental growth is not imminent. As a result, while we expect the headline prime yield to trend down further as rents drop to more sustainable levels, the underlying yield on the core achievable income is likely to remain steady until a firmer base for the economy is in sight.”