Commercial yields show signs of hardening but meaningful recovery in volumes most likely
According to Savills, improving investor sentiment has progressed into yields hardening in some UK commercial property sectors, with high street retail yields coming in by 25 basis points and further downwards pressure being exerted on them, and the same pressure being reported on shopping centres, London leased hotels, and foodstore assets.
In its latest Market in Minutes report, Savills says that falling debt costs coupled with improving occupational metrics in some sectors have kept the average commercial prime yield relatively steady month-on-month at 6.07%. However, while pricing is improving, transactional activity in Q2 remained low, the international real estate advisor says that with a clear outcome from the General Election and rising CFO confidence, which historically pre-empts changes in commercial investment by four quarters and most recently saw an upswing in Q3 2023 (see chart below), investment volumes are due an upswing in the autumn.
Richard Merryweather, joint head of UK commercial investment at Savills, comments: “Although June’s investment volumes ended another flat quarter, we believe pricing and CFO sentiment are better indicators of the market’s direction of travel and that those signs are pointing to a Q3 recovery, especially if we also see a cut in the Bank of England’s base rate. In previous economic cycles, the general pattern has held true that when things change they change faster than expected. The first signs of this across multiple sectors are now apparent.”