C&W signals growing caution in UK secondary market

Prime yields in the UK fell 8 basis points in April to an average of 5.79%, according to the latest capital markets business briefing on the UK from Cushman & Wakefield. This is the lowest level since May 2008, the adviser said, adding that yields are now reportedly stable in most sectors, with downward pressure in just five of the 25 categories analysed, the lowest number for nearly a year.

In most areas of the secondary market meanwhile, yields are stable but with often limited transactional evidence to underpin this and a growing fear that yields, or more certainly rents, have further to weaken in the months ahead. Yields were stable across most markets in April, with shopping centres, London retail and City offices the key areas showing further compression over the month and the only segments where yields remain under pressure.

However, the market is very much operating in two tiers, the report concluded, with prime secure from most perspectives but secondary stock under pressure. Overall, April was a more cautious month in the property sector and this is unlikely to change in the very short term in the wake of the general election, the adviser added.

In general many investors are still frustrated by the lack of prime property available on the market and the strong buying competition that exists but there have been signs of an increase in supply coming through in some areas. Interest in development opportunities is increasing, particularly in office and distribution markets, but while future supply shortages are a support for prime, there is no sign of shortages set to emerge any time soon in the secondary market.

David Hutchings Head of Research, Cushman & Wakefield : 'It may be a big assumption to make, but if a stable government is in place, the UK outlook, economically and for real estate, may be better than some think. Spending cuts need to be made but these will hardly be a surprise and strong early action should be accompanied by low interest rates and a still weak pound, but also more stable bond yields if inflation bulls are proved wrong. All of this would be a positive support for property pricing in the months ahead and with the momentum already in the market, we have raised our forecast for total returns this year to 18% from 13% three months ago.'