^{Source: Savills Research}

■ The most obvious explanation for this change would be a reduction in the number of buyers in the run up to the referendum on membership of the EU. While this has undoubtedly already impacted on the volume of transactional activity, our data for Q1 show that activity was marginally up on the long run average for the first quarter of the year.

■ Perhaps a more realistic explanation might be the broadening acceptance of the fact that the total return on UK commercial property is likely to be lower in 2016 than it was in 2015. Our prediction at the back end of 2015 was that the average total return for this year was likely to be around 7.5% (2015 13.1%), due to a reduced contribution from capital value growth. We were always expecting that the level of investment activity in 2016 would be lower than in 2015 due to the close correlation between transactional activity and the total return.

■ However, this simple explanation rather disregards the comparative performance of property against other assets, as even this lower return is likely to be better than on many other asset classes. Thus, we remain of the view that UK commercial real estate is likely to remain comparatively popular, and this will mean that the recent yield movement is likely to be a blip rather than a trend.

^{Source: Savills Research, MSCI}

Are non-domestic investors worried about UK stability?

■ While the signal to noise ratio around the forthcoming referendum on our membership of the EU might give the idea that it is all that any investor cares about, a number of recent pieces of data point to the whole debate being rather parochial.

■ For example, the UK's financial account surplus (i.e. the net inflow of foreign capital into the UK) reached a record high in the final quarter of 2015. Also, as Graph 2 shows, the net purchase of UK gilts by non-domestic investors has also shot up in January and February 2016.

■ This more rational view of the Brexit debate is also, in our experience, true in the property market. Generally, our non-domestic investor clients seem to be the most relaxed about the likely direction of the referendum, with most commenting that they have never invested in the UK because it is part of the EU, but because of the comparative performance of the assets and the defensive nature of the UK lease structure.

Source: Thomson Reuters

Is rental growth picking up as capital value growth slows?

■ As capital value growth starts to slow, investor's eyes swing towards the prospects for rental growth. A year ago the rental growth story was fairly patchy, with a marked London and the rest divide, but the latest monthly data from MSCI shows that the rate of annual rental growth from all the main commercial property sectors is continuing to improve (and that this recovery is no longer just a London story).

■ The average annual growth in standard shop rents over the last 12 months has been 1.5%, though there are some regions where rents are still falling. In the office market, not only is the national average growth in rents now at 8.53%, all UK regions are now delivering positive rental growth of more than 1.5% pa. Industrial rents have grown by an average of 4.95% over the last 12 months, with industrials in London delivering an 8.8% growth in rental values in the year to the end of February 2016.

■ So can this recovery in rental growth be sustained? Certainly there is little evidence in any of the main sectors and regions that the supply-side is likely to loosen much in the immediate future. Developers remain relatively cautious, and development finance remains hard to find. This means that a slowdown in rental growth is more likely to come from some sort of demand-side shock than a more traditional supply-side overreaction.

■ While the economic outlook is not strong, the UK remains one of the better performing developed economies, and the latest consensus forecasts are pointing to average annual GDP and consumer spending growth of around 2% pa.

■ This level of growth will support steady occupier demand in most locations, which against a background of restrained supply should deliver equally steady rental growth.

^{Source: Savills Research, Real Estate Forecasting}