After indications at the end of 2019 that the average prime yield on UK commercial property could move out to a point comparable to that seen in May 2014, strong bidding activity in the first four weeks of 2020 implies that yields are set to harden once more, according to broker Savills.
The average prime yield at the start of January stood at 4.94%, with upward pressure visible on yields in some retail and office markets. However, strong interest and activity across all UK commercial property sectors in the last few weeks has put a halt to outwards movement, leading to the average prime yield likely to remain steady or even harden in the near future.
Downward pressure is already being seen on office yields in London’s West End, which currently stand at 3.75%, while logistics yields have now remained static at 4.25% for the 23rd consecutive month.
While overall UK commercial property investment volumes fell 23% year-on-year between 2018 and 2019, from £63 bn to £48.4 bn, volumes for the year still remained above the long-term average, according to Savills. It notes that overseas investors continued their dominance of the UK market, increasing their market share from 44% in 2018 to 49%, however the geographical source of capital changed as Far Eastern investors decreased the capital they deployed by 54% from £11.2 bn to £5.1 bn while investment from North American sources increased by 96% to £8.4 bn.
James Gulliford, joint head of UK investment at Savills, commented: 'There is every reason to believe that 2020 will see investment volumes rise as we reach the nadir for retail values and investors look to cash in on a strong London office market. We have witnessed a marked uplift in offers received on assets where bids have been called in the first weeks of 2020.'