UK commercial property yields to stabilise, says Invista REIM

UK commercial property yields may now stabilise if the government and Bank of England actions succeed in steadying financial markets and reducing corporate bond yields, according to the latest research report issued by Invista REIM.

While domestic institutional investors continue to express concern about the effect of poor economic growth and occupational demand on the property sector, foreign and private investors appear to be ahead of the curve in providing the jump-start required for liquidity to return to the commercial property investment market. Such investors are attracted by the high-yield margins, which are emphasised further by the weakness of pound sterling. However, this trend hinges on the actions of the government and Bank of England over the coming months to review the corporate bond market structure and ease the illiquidity premiums substantially., the report said

Over the coming months, Invista expects that two of the key attractions of UK commercial property as a real investment asset, may increase in importance. These are the relatively stable income stream it produces, resulting from the UK lease structure and diversity of its tenant base, and its appeal as a physical asset. With quality of asset becoming key to determining performance over the next 12 months, Invista maintains its preference for prime, well-located properties.

Furthermore it predicts that transactional yields on secondary properties will continue to move out, while the yields on prime property may have started to reach their turning point, reflecting a substantially revised investor appetite for the higher level of risk associated with the former property type.

In the last quarter of 2008, industrial property proved to be the most defensive asset, outperforming the rest of the sector with a return of -12.1%, against falls of -12.7% and -13.7% recorded for the office and retail markets, respectively. In addition, conditions in the occupational markets are expected to worsen in the near term, as the current economic downturn continues to pressure sales and profits with an increased risk of tenant default. However, Invista predicts that rental falls are unlikely to repeat the lows experienced in the early 1990s, owing to relatively favourable economic fundamentals, with lower inflationary pressures and bank rates, combined with restricted supply lines.