Thanks to yet stronger demand, UK commercial property yields edged down further last month and now average 5.01% across all sectors. This is 50bp down on the year-to-date and the lowest yields have been since September 2007, according to global real estate adviser Cushman & Wakefield’s monthly update on the UK real estate investment market.
For those concerned with relative pricing, it is worth noting that yields still average 57bp more than at the peak of the last cycle and offer a healthy premium to bonds, with prime yields on average 274bp above the 10 year Gilt benchmark, more than twice the long term average.
At the same time, whilst the trend in yields is still down, the pace has eased slightly, with around half of the categories shown below still subject to downward pressure but the other half now stable.
This is likely to remain the pattern for the months to come: with downward pressure continuing but in a more selective fashion as different sectors demonstrate their performance potential and encourage investors to be more competitive in their bidding. In the last few months for example, it has been the industrial sector where rental trends have encouraged higher demand. Regional offices have also seen a notable turnaround on the occupier side and going forward other sectors will feature as corporate investment spurs demand. Interest will also increase for higher yield and longer lease property if quantitative easing in the Eurozone reaches its full potential – which would soak up income investment opportunities, displacing demand towards other markets including the UK.
At the same time, investor buying power is still being boosted by the improving availability of finance, with high competition keeping lending margins under pressure, particularly at the prime end of the market.
Investment supply meanwhile has shown some signs of improving, partly opportunistically as some owners test the market ahead of the busy and pressurised year-end period. In many cases, however, this increase in supply is from a low base and still fails to match demand.
Loan sales will remain an important source of additional product to bridge part of this gap, with €22bn of CRE loan and REO sales so far in 2014, more than double the figure seen in 2013 as a whole. What is more, secondary sales are also now increasing as earlier loan and portfolio purchasers start to follow through on their business plan with a more active sales programme.
Cushman & Wakefield’s CEO of UK capital markets, David Erwin, said: “This year is building towards a crescendo of activity across all sectors of the UK investment market. It’s pretty close to a perfect market with equity and debt freely available for the right deals in almost every geography and sub-sector and a steady supply of stock. London continues to power forward and seems to have established itself as the leading destination for truly global capital. Both the retail and provincial office markets are performing better than for many years in terms of volumes but the star has to be the logistics sector where the quality of income and buildings on offer, together with the real prospect of rental growth for the first time in a generation, seems to be ticking all the boxes. If we add in the significant debt transactions currently in the market it all points to a potentially record year for turnover and a happy, but busy, Christmas for the agency community.”
Federico Montero, head of EMEA loan sales at Cushman & Wakefield, said: “Having gained control of the underlying properties, acquirers of large commercial real estate loan portfolios are now switching sides and bringing smaller repackaged asset portfolios to the market in the hope of capitalising on high levels of investor interest. A recent example saw Lone Star sell Project Woodstock, a UK logistics portfolio relating to former EuroHypo loans, to Oaktree Capital.”
Cushman & Wakefield’s head of EMEA investment strategy, David Hutchings, said: “While investor attitudes towards Scotland have yet to be fully repaired post referendum, regional markets in general are ending the year on fire, in common with the trends we are seeing elsewhere in Europe where investors are looking further afield than the gateway cities to find quality stock. With this widening of search parameters as well as increased potential supply from loan sales and elsewhere, not only is 2014 ending strongly, but 2015 could be stronger still.”
