UK commercial property remains stable
Hardening yields on industrial distribution and multi-let assets, combined with signs that West End office yields may also be about to come in, keep the UK commercial property investment market on a stable footing, despite the all-sector prime commercial yield climbing slightly in July from 5.21% to 5.23%, says Savills in its latest Market in Minutes report.
Investment volumes remain subdued in July according to the international real estate advisor, with £2.0 billion transacted last month, taking the year to date total to £20.2 billion, compared to £25.8 billion in the first seven months of 2019. But yields on industrial distribution assets now stand at 4.25% and industrial multi-let at 4.00%, both down 25 basis points on last month, according to Savills, with indications that West End office yields may drop from their current position at 3.75% in the future. With prime office yields in the UK’s key six regional cities, in comparison, remaining at 5%, this widening yield gap between London and the regions could fuel investors who are seeking value to look beyond the capital, says Savills.
Richard Merryweather, joint head of UK investment at Savills, comments: “The summer months are traditionally quiet for commercial investment, and Covid-19 has accentuated this with vendors delaying bringing assets to the market, but there are still many investors targeting UK real estate. We anticipate that pricing will remain competitive on core assets once they come to the market, with a strong buyer pool waiting in the wings, which should significantly boost Q3 activity compared to Q2.”
Clare Bailey, director in Savills commercial research team, adds: “When it comes to investing in regional offices, Grade A rents haven’t fallen across the ‘Big Six’ markets since 2007 and the current vacancy rate is just 7.5%, the lowest on record, with very little development activity in the pipeline. This means that the occupational fundamentals of Grade A office space in most markets remain strong and the prospect of resilient rental income could be attractive, particularly to investors who may be priced out of prime markets.”