Competition from investors for a limited supply of prime UK commercial real estate assets is leading to increasingly aggressive bidding with prime yields falling 35 basis points in October, the largest monthly fall since at least 1993.
In Cushman & Wakefield's November Business Briefing on the UK Property Investment market, the average prime yield across all sectors is now 6.58% (83 bp lower than in March) with 21 of the 25 key market segments analysed now on a downward trend.
There is widespread consensus amongst domestic and overseas investors that the UK market now offers historically good value in what could be a limited window of opportunity to secure well priced prime assets in what is the most established and sophisticated European commercial real estate market. A lack of stock is subduing activity however, and a marked increase in supply looks unlikely in the short term.
Since the summer the industrial sector has seen the strongest overall yield compression with the headline average falling 123 bp. However, retail is now the most favoured sector, and in particular, retail warehouses, where aggressive bidding cut yields by 85bp in October alone. The overall retail market saw a 48 bp fall in October, taking the sector's aggregate fall since the peak in March to 108 bp - equivalent to a 16% increase in capital values. Office yields have fallen 44 bp over the same period, of which 15 bp was in October.
David Erwin, head of UK capital markets, Cushman & Wakefield, said: "Investors seem to believe that they will look back on 2009 as an historic low point for pricing so it's no surprise that buyers are rushing in now so they can claim they made a purchase at the right time. However, with a real shortage of quality property to offer them, some commentators are already worrying that we're heading back into a bubble. Only time will tell if this is right but it's certainly true that for those that want to sell stock they don't see as a long term hold, now is a great time to test the market. We can't see any real equilibrium coming back into the market until property supply increases perhaps when the banks start to unlock some stock."
David Hutchings, head of European research, Cushman & Wakefield, said: "For equity buyers yields can fall lower yet and still look attractive compared to bond returns. However, this is only the case where the income is secure or the property offers good medium term growth potential. The real danger therefore is not that prime pricing is moving too fast but that attitudes towards risk adjust too quickly and that optimism about the timing of the occupational market recovery runs ahead of reality."
Source: Cushman & Wakefield