UK Property Investment Market - Yields compressed at the fastest rate in 5 years as the UK Property Market moves towards a new phase in the cycle

Tue, 12/09/2014 - 13:26 -- jamesstuart

The UK investment market is set for its strongest year since 2006 propelled by another strong quarter of trading in Q3 2014.  Investment totalled £15.2b across 750 transactions, a jump of 20% year on year.  Assuming the average Q3 to Q4 uplift is consistent with previous 4 years results.  Investment is projected to top £62b in 2014, the highest annual total since 2006.
Although the office sector grabbed the largest share of investment gaining Q3 with a 40% of all investment, the quarter was notable for the weight of capital ploughed into the UK’s retail sector, and retail warehouses in particular.  Investment in this sub-sector quadrupled quarter on quarter to £1.6b by the far the strongest quarter since the financial crisis.  Hotels were also popular in Q3 with more than £1b traded in this sector for only the second time in the last 7 years.
In a continuation of the recent trend, investment outside of London strengthened further in Q3, fuelled by investor confidence in the UK accelerating economy, improving market fundamentals, and fierce competition and tight pricing in London.  As in Q2, 55% of investment found its way into the regions (excluding multi-region portfolios), the highest percentage since Q1 2011.
The sheer weight of demand is pushing down yields across the board.  The average in all property yield tumbled another 57 bps over the quarter to 6.97%, its lowest level since Q2 2010.  However, with yields now comfortably below their 5 year averages in all property sectors rental growth will need to replace sentiment as a primary driver of capital value growth over the next 12 months.  The time for picking up well let assets and waiting for a yield compression to drive values looks to be at an end.