Prime to secondary UK commercial property yield gap narrows
UK commercial property yields have continued to fall across prime and secondary markets since the summer, with prime down 7bp since June to an average of 5.1 per cent while secondary are down 17bp to average 7.8 per cent, according to Cushman & Wakefield.
So far this year, prime yields have fallen 43bp but secondary are down 146bp, significantly closing the prime to secondary yield gap. At the same time however, with Gilt yields falling in the past quarter, property’s yield advantage relative to bonds has edged up once more.
Such yield premiums continue to attract investor demand and this is well supported by debt markets, with finance availability continuing to broaden as a growing range of lenders look at a growing range of markets. In the process, most are taking on more risk to achieve better rewards as core pricing stabilises with margins of 125 to 250bp.
Signs of greater vibrancy in the occupational market will also be a notable support going forward. The industrial market, for example, has been coming under pressure for some time as demand has grown but supply has remained tight and rents are now set to grow following the strong tone set in some recent letting deals.
In the retail sector, casualties continue to be seen in a fiercely competitive market but sentiment is increasingly positive if still selective. In town prime markets are firming while out of town there is rental pressure for the right stores and locations. Office markets meanwhile report stable or rising demand, notably in the Thames Valley and Central London and with good quality space increasingly hard to get in most markets, rental pressures are increasing.
Investor demand is strong across the board for prime and notably in excess of supply, particularly for regional offices and with the Scottish independence referendum behind us, demand as well as supply are set to increase. More buyers also continue to turn towards secondary markets, with regional and West End offices as well as shopping centres particularly in demand and only secondary in-town shops and retail parks still out of favour. Supply is however showing some signs of improving – albeit modestly – with more City offices, industrial and secondary shopping centres coming to the market.
While uncertainty caused by Scotland’s referendum may have slowed the Scottish market, it clearly did not derail activity and interest in the UK as a whole and with the result now settled, a strong end to the year is in prospect across the country.
Cushman & Wakefield’s chief executive of UK capital markets, David Erwin, said:
“Seldom have we seen the UK property investment market in such good working order. There is a weight of money for all sectors and an excellent equilibrium of supply and demand. This market strength is no longer focused on central London – which remains strong – but has extended to the regions where in particular the logistics and shopping centre sectors are extremely active. We are undoubtedly entering a very busy period for investors and advisers in the lead up to Christmas.”
Richard Peace, partner at Cushman & Wakefield, said:
“We are seeing rental pressure on prime logistics sites move in favour of developers with inducements being substantially lowered and rents now moving up through tenant demand. The recent pre-let of a 152,500 sq ft warehouse to UPS at Birch Coppice in Tamworth by IM Properties is evidence of this where they have achieved a rent of GBP6.15 psf on a 15 year term. Comparable lettings on the same park only 12 months earlier were achieving GBP5.00 to GBP5.70 psf. This should have a knock effect throughout the midlands and penetrate further south down the M1. This is a major boost for the market and will draw more investors to the sector”
David Hutchings, Cushman & Wakefield’s head of EMEA investment strategy, adds: “As investors take on more risk, many are hedging in favour of continued robust economic growth amid signs of greater vibrancy in the occupational market. Rents and incentives in some areas of the market are already under pressure but investors need to stay alert to the fact that it is good quality space which is increasingly hard to find and there are few signs yet of weaker property in weaker locations seeing an improvement.”