The UK investment market has grown yet stronger in recent months, with the uncertainty of the election fading and the market’s safe haven status back to the fore amid renewed fears over eurozone stability and stock market volatility, notably in China, according to Cushman & Wakefield’s monthly briefing on the UK investment market.
With overseas investors increasing their share of market activity further, investment volumes in H1 were 31% ahead of the first half of 2014 while yields fell 18bp over the first half of the year, now standing at 4.8%, the lowest point since September 2007. However, while now significantly below the 10-year average, prime yields are still 39bp higher than pre-crisis levels despite 10-year bonds being 280bp lower.
All sectors have seen yields fall in the past quarter, with shops at the forefront taking over from shopping centres which drove compression in Q1. However, the strongest excess of demand over supply is still reported to be in the prime shopping centre market, along with Thames Valley offices and prime industrial.
Larger assets are being targeted as investors look to get more money into the market quickly, reflected in demand for sectors such as City offices as well as for shopping centre and industrial portfolios. Assets in less traditional sectors such as hospitality and leisure are also being keenly pursued, with several large portfolio deals recently agreed.
In the occupational market, demand outweighs supply in virtually all sectors and rental pressures are increasing. The main exception remains retail, where in and out-of-town prime units are seeing an improvement but store closures are affecting weaker markets.
London is still leading the way, with very high tenant demand notable in West End retail and office markets in particular. However, growth pressures continue to spread more widely, led by office and industrial markets, and investors have followed occupiers into the regions in hot pursuit of yield as well as growth potential.
The industrial sector is currently subject to extraordinarily high demand meanwhile, as ecommerce drives tenant activity. A shortage of prime investment opportunities is forcing investors to look towards secondary markets or take on risk, with more speculative development now underway for example. With the trend of rising build costs spreading out from London, rents will remain under pressure but this will also push more demand towards good quality second hand space.
David Hutchings, Cushman & Wakefield’s head of EMEA investment strategy, said: “The storm clouds over Europe have once again made the UK stand out as a safe haven destination for many global investors and even though the latest eurozone crisis may now be about to start waning, aftershocks will continue given how fraught the negotiations have been. Alongside stock market volatility in China and the impending start of monetary tightening in the US, the UK is therefore likely to remain strongly in favour for some time yet and hence our expectations for trading activity and pricing continue to increase.”
Cushman & Wakefield’s chairman of UK capital markets, Patrick Knapman, said: “We are now witnessing rental growth coming through in many submarkets which is leading to further yield compression as investors factor in some reversionary potential.”