Prime yields falling to 'unjustified' levels in the UK

The wall of money hitting the UK market has caused prime yields to fall below pre-Lehman levels, according to Paul Clark, director of investment and asset management at the Crown Estate. 'With the occupier market still weak, it's hard to justify prime pricing,' he said. 'I'm less enthusiastic about the market than three to four months ago. The occupier market is at best sluggish and at worst it's in a pretty bad way.'

Clark was speaking at the opening conference of the Mipim property fair in Cannes on Tuesday in a panel discussion entitled 'Recovery positions: institutional behaviour building on traditional value.' Kiran Patel, global head of research, strategy and business development at AXA Real Estate, agreed that the prime end of the UK market was 'out of kilter'. 'The investment and occupier markets are unsynchronized.' He added, however, that the situation on the European continent was slightly different. 'There are some interesting opportunities that we won't see again for the next 12 to 15 years. This is a good time in the cycle.'

Matthew Ryall, head of indirect investment at Allianz Real Estate, likewise expressed surprise at the rapid repricing of the UK market. 'We're not quite back at 2006 levels, but I'm surprised at how quickly things have improved.'

All three panelists concurred that real estate cycles are becoming shorter and sharper due not least to capital market movements. Patel pointed out that indices like the IPD typically lagged the market by some three months: 'Investors need to be more reactive, you have to be quicker in getting in and out. There will always be big and mini cycles. You can't get away from the fundamentals of supply and demand.'

While the cross-border investment market in Europe shrunk in the second half of 2009 to 33% from 60% in the boom years, Ryall believes it will gradually rise again in the next decade. 'But it won't be back to 2006-2007 levels for several years,' he added.