■ Two sectors, Regional Hotels and M25 Offices, saw prime yields come in last month. The interest from the UK Funds for M25 offices is exerting the greatest downward pressure on yields. In contrast, Foodstores saw another yield shift out as demand weakens in the face of tenant demand concerns.

■ Investors continue to ask, "Where are yields heading?". Average prime yields reported a two basis point (bps) movement down in September and are now within 22bps of early 2007 levels. Three sectors are at, or below where they were in mid 2007 (WE offices, shopping centres, and distribution).

■ However, the advance of yields towards market peak levels is unlikely to subdue demand. Buyers last year had the same concerns but investment volumes reached its highest level since 2007. The brakes on yield hardening will only materialise if there was a significant slowdown in the economy.

■ Eight of our sectors still have prime yields at least 25 basis points above 2007 levels. Even with a further movement downwards, the yield spread to Gilts means that property investment will continue to be attractive.

click on Table 1 to enlarge

■ Eight of our sectors still have prime yields at least 25 basis points above 2007 levels. Even with a further movement downwards, the yield spread to Gilts means that property investment will continue to be attractive.

■ The later and slower than expected rise in interest rates next year will see Gilt yields increase. Even if Gilts were to rise in line with Base Rate forecasts, a relatively healthy spread to Property in excess of 150bps would still remain. It currently stands at 295bps. As a result we expect yield compression will continue, albeit at a slower rate.

■ Those sectors where yields are still some way off 2007 levels, and offer the greatest opportunity for rental growth, are likely to see the more pronounced downward shifts. Regional offices, particularly in the stronger markets of Manchester and Leeds, stand out on this basis as occupational demand picks up in the face of Grade A availability constraints.

click on Graph 1 to enlarge

Taken from
Market in Minutes: UK Commercial - Oct 2014