UK prime headline yield falls below 7%

9 Oct, 2009, London

Investor sentiment rose further in September as first signs emerged that occupational markets may soon start to start stabilise, according to Cushman & Wakefield’s latest Business Briefing on the UK Property Investment market.

Prime yields fell an average of 13bp in August, taking the headline average below 7%, for the first time since November 2008. With yet further to fall, yields are now 49bp lower than in March with yields falling in 19 of the 25 sub markets analysed.

With some relief, investors are noting an improvement in sentiment towards the occupational market, with the outlook reported to be stable in 22 segments versus just 7 in August. The fundamentals remain relatively weak - availability is rising and rents remain under pressure even with the support of historically high incentives but there is at least activity with tenants taking advantage of the soft deals on offer.

The rise in tenant demand for the best space, coupled with new completions falling, some investors and occupiers are starting to anticipate a shortage of prime space as early as 2010.

Retail has benefited the most from further yield compression over the past month with shops and retail warehouses under the spotlight again. Shopping centre yields moved in for the first time this cycle, with the headline yield dropping back to 6.75% helped by the evidence coming from Land Securities’ sales of their stake in the Bull Ring, Birmingham.

Offices are benefiting from new sources of investment demand among Far Eastern buyers as well as UK and continental European funds, whilst higher investment demand for prime industrial stock is resulting in more aggressive bidding keeping yields under pressure.

The report concludes that despite some long-term concerns for the market, prices are set to rise in the short-term with liquidity high and the sector seen to offer good relative value.

David Erwin, CEO of Capital Markets UK: “The market suddenly feels like a better place and we probably have the strongest investment market we have seen since early 2007. It is very likely that prices will harden between now and Christmas and possibly even up until the election with the weight of money, the relative pricing of the sector and a lack of good stock all adding to short term optimism.”

David Hutchings, Head of EMEA Research at Cushman & Wakefield said: "The current investment market rally is clearly gathering momentum quickly but its sustainability in 2010 may be questioned until we see evidence of an improvement in the tenant market. The better signs now emerging of new occupier demand are clearly a very encouraging sign but these are largely focussed on prime space. Indeed, with businesses likely to remain cost conscious over the coming months, the polarization in the market between prime and secondary is likely to only increase."

Full report can be downloaded from the Knowledge Centre.

Ends

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