The upward trend in UK property values was maintained in May with prime yields falling 6bp to 5.14% and secondary yields down 29bp to an average of 8.13%. Prime yields have now fallen 54bp over the past 12 months, an implied capital growth rate of 10.2%, but with a fall of 196bp, secondary values have easily outperformed, with implied capital growth of 24.1%.
By sector, it has been retail which has seen most gains in the prime market, led by retail warehouses.
However for secondary, office and industrial property values have gained most, reflecting an ongoing nervousness over the relative outlook for occupational demand in parts of the retail market. Interestingly however, investment demand is now increasing for secondary retail, focusing on the shopping centre sector. By contrast demand for secondary shops and retail warehouses, whilst improved, is still lower than in other segments.
Demand remains ahead of supply across the market, encouraging off-market activity as well as an ongoing push into new markets. At the same time, there have been signs of an improvement in prime supply in some areas, such as City offices. There are also signs that more prime shopping centres will come forward as profit takers test the market.
Secondary supply patterns are still more generous, if generally also falling, but recent price increases and competitive demand are bringing some more stock to the market, with industrial, regional offices and shopping centres all reporting signs of an increase.
Alongside this, the news from the occupational market continues to firm, in many cases ahead of expectations. The best retail parks are seeing new entrants emerging for example while industrial and Thames Valley offices are witnessing higher demand. In the City, office demand from the tech and media sectors has been strong for some time but this is now joined by renewed interest from other sectors such as banking and financial services.
This is flowing through to create pressure on rents and more particularly in many cases, on incentives. Good quality secondary stock is being reappraised by some occupiers as a result while others are looking to the pre-let route, sparking a modest increase in development interest among some investors.
Debt availability remains highly supportive of the market meanwhile; with a further increase in risk appetites reflected in a greater focus on secondary markets and even some interest in providing speculative development finance. Having fallen round 50bp in the past 3-4 months, margins have been relatively stable over the past month at 1.25-2.50% although ongoing competition is maintaining downward pressure on costs, notably of late for mezzanine finance.
Cushman & Wakefield’s head of EMEA investment strategy, David Hutchings, said: “Strong buyer demand and limited supply have continued to drive down yields but the gains for secondary property have been the most dramatic – with an implied increase in capital values of over 24% thanks to lower yields in the past year compared to a 10% gain for prime. Sector trends do show somewhat different patterns however with retail seeing the greatest prime growth but office and industrial gaining most in the secondary sector. Yields are set to move lower still in the second half of the year but there are now signs that higher pricing will soon bring forward more stock and that should steadily help to stabilise pricing.”