Further improvement in UK investor sentiment

4 Sep, 2009, London

A further improvement in investor sentiment in UK commercial property was evident during August with signs of more widespread yield compression for quality assets, according to real estate adviser Cushman & Wakefield’s new Business Briefing.

Prime yields fell an average of 15bp in August, with the headline average now at 7.03%, its lowest since November 2008.

Demand for secondary property remains weak in general and the gap between supply and demand for quality assets has widened further over the past month.

Stronger economic sentiment has helped the market but the gap between supply and demand has been exacerbated, with a scarcity of prime stock coming available, which is forcing yields to correct as bidders compete for investment opportunities. Demand is expected to grow further over the coming months with evidence, for example, that European investors may be ready to make new fund allocations targeting the UK.

However, despite a marginal improvement in recent weeks, occupational trends remain weak and rents continue to fall across most parts of the market. In Central London the office market is seeing signs of stronger occupier activity and that the second half of 2009 may improve in terms of take-up, albeit from historically low levels, as occupiers gain in confidence and look to take advantage of market conditions.

Yields fell in 9 out of its 25 key yield indicators in August, with yield compression more widespread than in July and all sectors now experiencing yield falls. Moreover, the trend in yields remains downwards, with shop units and London offices under most pressure - with industrial and retail warehousing now pausing for breath after sizeable yield falls since the Spring.

David Hutchings, head of research EMEA, Cushman & Wakefield said; “On the back of more positive economic sentiment, we are seeing the first signs that occupational property markets may soon start to find their floor. However, it is clear there will be more pain to come in the short term and investors must be sure they have this priced into the assets they are buying – and those they are holding.

For now, pricing is still attractive but once investors start to push into the secondary markets to find stock – and there are signs that some may soon be ready for this - then risks will grow that investment market pricing will get ahead of occupier market trends.”

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