IPD: Commercial property recovery continues to soften (UK)

The pace of yield compression in UK commercial property markets has reached its fastest annual rate for 16 years, according to the IPD UK Monthly Index. Equivalent yields, which have now compressed for a full year, from 9.3% in June 2009 to 7.6% last month, last eclipsed 170 basis points over 12 months at the end of the last property recession in mid 1994.

"The last time yields compressed at this annual rate was in the mid-1990s, the following month yields started to move out again. At the end of this 12-month cycle, yields compression has eased to just fractional movements," explains Malcolm Hunt, Head of UK Client Services at IPD.

Over May, the pace of UK commercial property capital growth eased for the second consecutive month, at 0.5%, reflecting a moderation in yields and rental decline. Rents fell by seven basis points in May, the shallowest monthly decline since August 2008, but by -10.7% in total, compounded over an unbroken 25-month period.

The yield and rental movements have delivered a compounded capital growth of 14.6% since markets resumed growth last August, while the annual capital growth rate is 13.5% – the highest since November 2006.

Hunt added: "If the downward revision of UK economic growth forecast by the Office for Budget Responsibility proves accurate, there will be implications for property fundamentals. Historically, property markets suffer when economies falter; affecting occupier markets and rental growth which, in turn, influence property values."

Source: IPD

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