Will yields fall further?

Yields continue to fall across all sectors in 2014, while rental growth is expected to head back into positive territory.

17th December 2014, words by Steven Lang


■ During the seven month period before October, the 'average' prime UK yield fell in each month. Despite static yields across all sectors in October, they fell again in November. This has been driven by City Offices, Industrial Distribution and Leisure Parks.

■ However, one of the most significant changes, since last month, is the appearance of more upwards yield trend arrows within the retail sector.

■ The prime average is 4.66%, the lowest since June 2007. Can they move lower? Some sectors remain firmly on the buy list for UK institutions as cash continues to flow in.

■ This demand from the funds is illustrated by looking at Unit Trusts/OEICs data. According to the Investment Management Association, they have seen property funds, under management, expand from £17.6 billion in November 2013 to £23 billion in October 2014, a 31% increase.

■ The gap between the IPD 'average' and Savills prime equivalent yield, compared to the five-year swap rate, is 300 and 470 basis points, respectively. This is in-line with the medium-term average. Encouragingly, as shown in Graph 1 (below), the main sectors have seen annual rental growth back in positive territory. This is driven by London performance, but the 'Rest of UK' retail is also expected to move to positive growth within the next few months.

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Graph 1

■ Overall, total UK investment will break through the £50 billion barrier again this year (£54.5 billion in 2013). UK institutions and overseas investors are the largest net buyers in 2014, which has been driven by enhanced confidence in the regions and more liquidity in London. In fact, the property company sector has seen net disinvestment of £5.9 billion, as at end-November, due to the expectation of slower returns next year and taking the opportunity to recycle the capital gain into new opportunities, potentially within secondary assets.

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Table 1



Key Contacts

Steven Lang

Steven Lang

Commercial Research

Margaret Street

+44 (0) 20 7409 8738


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