UK property market set to bounce back after prime yields fall to 4.8%

The UK property market is expected to bounce back before the summer following a period of yield compression, according to Cushman & Wakefield.

Prime yields have dipped to an average of 4.88% while the gap between prime and secondary yields has shrunk to its narrrowest level for more than three years. Secondary yields were down eight basis points to an average of 7.25%.

‘With the UK election settled, many are thinking it's now back to business as usual and certainly the market is in a good place, with a bounce in activity quite likely ahead of the summer,’ said David Hutchings, head of EMEA investment strategy, in C&W’s latest monthly market briefing.

‘However, there is plenty of room for surprises later in the year as the new government's policies come forward and investors need to keep a careful eye on market fundamentals.’

Lack of supply continues to hold back the market, but rising prices will tempt more vendors to the market, while recently purchased debt portfolios are unbundled and sold on.

C&W also said more capital was being pumped into the market and investors were broadening their target range, creating demand for finance across all lender types and sectors. Debt funds are growing more noticeably, targeting the value-add and opportunistic end of the market rather than the crowded core segment.

Supply remains the main brake on activity, but this is slowly changing as investors broaden their target range, as higher pricing encourages some more vendors to come forward and as recently purchased debt portfolios are unbundled and sold on, according to C&W.

Occupier demand is also more encouraging, most notably in the industrial sector, where investor confidence has continued to rise, with portfolio sales pushing up volumes and more new development is coming on stream.

Office investment and tenant demand have both been strong in London and key regional cities, while tenant demand for prime retail space is also up and there are some signs of improving rents, though investor demand is still heavily concentrated in the prime sector.

Cushman & Wakefield’s chairman of UK capital markets Patrick Knapman said: ‘The better outlook for consumers has already filtered into the occupier market and investor demand is now ramping up across the prime retail market.

‘At least for shopping centres this also now extends into the secondary market, with a real depth to demand and highly competitive bidding pushing yields down. The same scale of interest for secondary retail warehousing or shop units is yet to materialise, however.’