Prime property recovery - 40% of yield loss now recouped
4 Dec, 2009, UK
Eight months’ of yield compression for prime UK commercial property assets have reversed around 40% of the investment yield lost since 2007. In Cushman & Wakefield’s December Business Briefing on the UK property investment market (its ‘prime yield report’), the company says that strong demand and supply shortages forced a further 38 basis point yield fall in November.
Full report at the knowledge centre HERE
The average prime yield across all sectors is now 6.20% with 22 of Cushman & Wakefield’s 25 key market segments falling in November with 18 expected to fall further in the short term. The biggest falls were in the office markets of the Thames Valley (a 75bp fall) with a 50bp fall in prime London and regional office markets.
Demand in the office sector is coming from a broad range of investors including UK funds in regional markets and foreign buyers dominating in London (Bank of China’s purchase of One Lothbury, EC2 for £86m last week being the latest high profile example). Investors have been buoyed by a firming in sentiment among tenants in the UK’s main office markets as many look to take new space before rents rise again and incentives fall. An increase in take-up of office space is expected to continue through 2010, albeit at a steady rate.
Yields in the industrial market are now down to their lowest since August 2008 as bidding becomes increasingly aggressive. UK funds are dominating a market which is currently seeing a much anticipated improvement in the occupier market with the availability of grade A space falling. This in turn is increasing demand for secondary industrial assets.
The retail sector has been especially busy with strong demand and an increase in supply from investors ready to take advantage of better pricing where they can. Demand is focused on prime locations and properties as buyers look to safeguard themselves against occupational risks. Because of this turnover in the secondary market has been very limited. It’s a similar story in the retail warehouse market where strong demand and limited supply have pushed prices up and made potential buyers much more discerning.
David Erwin, CEO capital markets group, Cushman & Wakefield, said: “November saw a continuation of the rapid recovery in the prime market with a still notable imbalance of demand over supply. Equity continues to flood in from all quarters – our market knowledge suggests that there have been at least 100 individual buyers for the 114 deals seen in London's West End market so far this year for example – and we are firmly in a sellers’ market. This will not suddenly disappear after Christmas – both the unallocated capital and the market view that property pricing remains relatively attractive – suggest the rally will push on into 2010.”
David Hutchings, head of European research, Cushman & Wakefield, said: “Nearly 40% of the yield losses seen between 2007 and 2009 and have now been unwound following eight straight months of yield convergence – and the pace of change is only growing stronger, with yields dropping 38bp in November after a 35bp fall in October – and the trend is still firmly down in the majority of areas.
“The key to whether this rally becomes a bubble is to be found not so much in the speed of the recovery but in the degree to which it spreads away from prime stock and it will be how investors chose to price risk that determines the success of their decision-making. This is under-scored by current market trends which clearly point to a very marked degree of polarization in the occupational market – with better signs of demand and hopes for increasing price stability in 2010 for modern, quality stock, but rising availability and continuing threats to income security for anything of a lesser grade.”
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