UK Property news 22nd August 2013

UK investment volumes reached £22.29bn over the year to July 2013, up from £17.53bn for the same period in 2012, according to Jones Lang LaSalle’s latest UK Monthly Commentary.

IPD total returns for all property in the 12 months to June 2013 stood at 4.1%, up from 3.4% in May. The agent said total returns were driven almost exclusively by income return as capital values declined yet again.

Prices are rising with more buyers for sound investments. Demand is selectively competitive for quality assets in the South East, especially London, attracting “safe haven” investment, UK wide prime and good property.

Buyers are predominantly from sovereign wealth funds, Asia Pacific, Germany, US, Middle East also UK private/”opportunity” fund/investors property companies, and UK institutions. There have been more sales from bank disposals/restructuring In August, the Jones Lang LaSalle all property prime weighted yield fell from 5.56% in the previous month to 5.51%. This was driven by three yield corrections in the office sector, namely West End offices <£10m (-25 bps), M25 Towns Preferred (-25 bps) and business parks in the South East (-25 bps), which led to a drop in the weighted prime office yield of 13 bps month-on-month and 27 bps year-on-year to 5.39%.

Whilst the weighted prime yields for retail and industrial remained stable, these sectors also saw yield compression in several markets. In the City office market, £4.4bn was transacted in the year-to-date, spread across 82 transactions. Overseas buyers continue to dominate the market accounting for over 80% of purchasers. However, this investor group’s appetite is beginning to diversify away from core deals, as illustrated by the acquisition of Lloyds Chambers by a US/Chinese consortium.

Interest in the North and Eastern fringes of the City continues to grow, driven by the prospect of rental growth, with 20 of the 82 transactions this year located in these areas. There were no changes to prime City office yields this month. In the West End office market, July was a very active month with just over £1bn traded, bringing the year-to-date figure to just under £3bn.

Demand remains high from overseas buyers, although there is also a growing number of UK institutions active in the market. Supply remains tight with available stock currently at approximately £400m across four buildings and no significant further supply expected until September. This had an impact on West End prime office yields in August: the prime yield for lot sizes up to £10m fell by 25 bps to 3.75%, while that for lot sizes between £10m-£80m fell by 25 bps to 4%. Prime yields for West End offices over £80m remain unchanged at 4.5%.

The Shopping Centre investment market saw a marked increase in volumes traded with 39 transactions occurring so far this year. This equates to a total volume of £2.2bn, 54% higher than in the equivalent period last year. There continues to be strong competition for prime assets, with the major theme being a lack of available stock.

Nevertheless 2013 has seen an increase in investor appetite for secondary assets, which this month led to a 25 bps hardening of the prime yield for secondary shopping centres to 8.5%. All other prime shopping centre yields remain unchanged, although tertiary shopping centres are now trending stable rather than weaker.

In the High Street retail investment market, there is a similar lack of supply of prime product. At the other end of the spectrum, in the secondary market, fundamentals remain weak. However, with yields close to double digit figures, investors are beginning to take notice, focusing on long-let assets with a strong tenant story. There were no changes to prime High Street retail yields this month. However Regional High Street and Market Town High Street are now seen to be trending stable. In the Industrial market, there is continued strong interest from UK funds and overseas buyers, driven by improving occupier conditions.

Supply however remains tight and is decreasing due to a lack of speculative development. In August, regional single let industrial saw prime yields move in by 25 bps to 6.5%, while regional multi let moved in by 50 bps to 6.75%. Although prime yields for South East single and multi let industrial remain stable, there was evidence of keener yields in London.