Yields under pressure as investors continue to chase commercial property

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Tim Matthews, Chief Executive of Blue Marble Asset Management

The weight of money looking to invest in commercial property is driving down yields, according to Birmingham-based specialist real estate asset management company, Blue Marble Asset Management (Blue Marble) which says that the investment market has improved in the past three months.

In the Spring 2017 Edition of the Blue Marble Barometer, the quarterly forecast of the UK commercial property investment market, Blue Marble says that the market is proving especially resilient to general political and economic uncertainties, with a continued hardening of prices and a strong demand for core property assets.

Blue Marble Chief Executive Tim Matthews say: “Unsophisticated investors (usually private investors) are paying some very strong prices.  This usually reflects occasions where private investors are chasing what they consider to be an attractive yield irrespective of the impact on capital value.

“As a consequence, non-prime investments in the industrial sector which previously might have been acquired at 8%+ net initial yield, are now typically around 7.5% – 7.0% or less.  The impact of lower yields is that capital values for such investments are now often higher than vacant possession values, even though contracted investment income may be relatively short term.

“This is a feature which is now becoming ‘the ticket price’ for entry into the commercial property investment market and for the prudent investor adds additional challenges to locate and acquire opportunities which mitigate exposure to premium prices, i.e. those above vacant possession values.

“High demand for investment property is currently combined with an historically low level of supply.  In the first quarter of 2017 we have seen a small increase in the number of opportunities being presented, although a lot of the properties coming to the market are secondary or even tertiary in nature.”

According to Mr Matthews, the commercial property market started 2017 strongly with both rental value growth and total return performing above trend in January and February.  He says: “The main reason for this positive start was the strength of the industrial sector which has outperformed all others for the sixth consecutive month.”

Figures taken from the CBRE UK Monthly Index for February 2017 reveal that All UK Commercial Property Capital Values increased by 0.4% in February, while rental growth was 0.2% (up from 0.1% in January) which was predominantly driven by the industrial sector which recorded strong rental value growth of 0.5% during the month.

The strongest industrial performance was recorded in the South East and this regional trend was mirrored in the office sector where the Central London/West End/Mid-Town/Outer London area recorded rental value growth of 0.2% during February, while rental values in the rest of the UK were flat.

Mr Matthews concludes: “Looking towards the next quarter and beyond, there is little to suggest that the current trends will be subject to significant adjustment with a large weight of money from institutional, overseas, property companies and private investors being targeted at the property market.

“However, one of the stand out points in the general economic data is the rise in CPI and RPI.  These will have an impact on real incomes and, although UK unemployment is at a low level, the rate of wage increase has slowed substantially which will potentially impact on consumer spending through lower consumer confidence.”

The Blue Marble Barometer is a quarterly forecast of the UK commercial property investment market based on current data and the direct market experience of Blue Marble Asset Management in acquiring, disposing of, and managing commercial and mixed use properties across the UK on behalf of its clients.  The next Barometer will be published in Summer 2017.