New data from Cushman & Wakefield (C&W) has revealed that even though investor activity continues to rise in the commercial property sector, prime yields now stand at an average of 5.72 per cent, the lowest recorded since October 2011.
The yield drops were led by the retail sector, especially in retail warehouses, which saw an average fall of 15bp, following further declines in 2011 and 2012. This means that retail yields are at a 16-month low. On the other hand, yields in the office and industrial sub-sectors are at their highest levels since 2007. This rise in office returns has been primarily driven by properties in London.
The report further highlights that investors are estimating yields to fall even further, with 14 out of the 25 categories monitored anticipating a decline. This is the strongest expectation of falling yields since the start of 2010.
However, even though yields are falling, investment volumes in the first six months of the year have been performing extremely well, with there still being strong demand for prime assets. Analysts suggest that low borrowing costs and government bond yields stabilising have potentially been behind this investor activity.
C&W's head of UK capital markets David Erwin said: "There is absolutely no doubt that there is optimism around the market which we haven't seen for a number of years. The macro view suggests encouragement and at a micro level there's a feeling that, particularly outside London, most of the rental bad news is out in the open and the occupational position improving.
"Capital is coming at us from a number of different directions and we can say, with some confidence, that pricing will firm up between now and the year end as evidenced by a spate of competitive bidding situations over the normally quieter summer months, particularly in the regions.“