Yields polarise as prime recovery continues

By Deirdre Hipwell

Cushman & Wakefield reports further ‘yield compression’ but secondary property continues to suffer

Prime UK yields fell by 15 basis points in August as the economy stabilised and demand from investors increased.

Cushman & Wakefield’s latest update on the UK property investment market, published this week, showed the average headline prime yield is now at 7.03% – the lowest since last November.

Yields fell in nine out of 25 subsectors (see graphic below) in August and ‘yield compression’ was more widespread than in July.

Cushman said that stronger investment sentiment and the few prime investment properties available were forcing yields to correct as competition increased.

Shop units and London offices remained under the most pressure, and industrial and retail warehousing were ‘pausing for breath after sizeable yield falls since the spring’.

Prime London retail held up well amid a ‘resurgence in demand’ for high street shops from institutions and private investors attracted to the historically high yields.

Retail park transaction levels were high in August and there was ‘fierce bidding on a small number of schemes, possibly indicating some concern among buyers over the future ability to source stock’.

There was also considerable interest in the industrial sector but there had been a repricing of prime properties. Cushman said: ‘Indeed, what was arguably a mispricing of the market in early 2009 in reaction to a lack of top-grade prime deals has now been unwound and the sector has seen the most significant yield compression to date.’

David Erwin, Cushman CEO of UK capital markets, said: ‘The market hasn’t eased back over the summer, with new investors still emerging and bidding growing ever more competitive. However, we’re not seeing any real volume of new prime stock coming to the market and it is probably this lack of supply more than overt signs of recovery that will continue to push yields down.’

Cushman said investor demand for secondary property remains weak and particularly acute for secondary retail property in the north. The yield gap between prime and secondary property has widened further.

Occupational trends also remain weak and rents continued to fall across most parts of the market.

David Hutchings, head of Cushman’s European research group, said it was seeing the ‘first signs of the occupational property markets finding their floor. It is clear that there will be more pain to come in the short term and investors must be sure they have this priced into the assets they are buying – and those they are holding.’

Activity in the derivatives market has also increased. Derivative pricing has reacted quickly to the improved sentiment and the implied annual total return for the UK IPD index improved to -6% in August, compared with -15% in June. (Deirdre Hipwell, Property Week) http://www.propertyweek.com/story.asp?sectioncode=36&storycode=3147990

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