UK commercial property yields have hardened to 4.65%, the lowest level since May 2016, according to international real estate advisor Savills.
Following three successive months of no movement, Savills prime yield series has fallen 10 basis points as continued investor interest, combined with relatively low levels of investment stock, has seen yields in a number of sectors finally respond to continued downward pressure.
According to Savills, in July, yields in the regional offices markets sharpened from 5.25% to 5%, as occupier demand continued unabated, while regional hotel yields and industrial distribution yields both hardened from 5% to 4.75%, the latter in response to continued high demand for limited stock and little speculative development. August then saw yields for retail warehouses (restricted) and foodstores follow suit, hardening from 5.75% to 5.5% and from 5% to 4.75% respectively. Foodstore yields are now at their lowest level since the end of 2014, says Savills.
The research also shows that UK investment volumes for the year to date are on a par with 2016, but the actual volume of transactions has fallen 6% compared to the same period last year, although are broadly consistent with the long term average, implying that larger value transactions may be maintaining volumes (graph below).
Mark Ridley, CEO of Savills UK and Europe, says: “Following the General Election, the UK markets saw an uptick in investor interest with the result that this summer saw the largest yield shift this year. While overseas interest in London remains unabated we are also seeing an uptick in the number of institutional investors keen to deploy capital outside of London, in markets that are not as likely to be directly impacted by the UK’s departure from the EU. Logistics, regional offices and foodstore assets have therefore performed well. The latter are particularly attractive at the moment as they offer long term indexed linked income, potential asset management opportunities led by residential or mixed use development, and the occupational market has also seen a resurgence driven by potential M&A activity by Tesco looking to purchase the Booker Group and the Co-op looking to do the same with Nisa.”
Kevin Mofid, director in the commercial research team at Savills, adds: “The UK logistics sector remains in vogue driven by structural changes in the retail sector. With speculative development levels so low and headline rents maintaining their upward trajectory, investors have been lining up to deploy capital into the sector. At the half year point, 2017 investment volumes in the sector had reached £2.3 billion, almost £1 billion higher than the same period in 2016, and 150% above than the long term average.”