Commercial property yields in Birmingham are among the best performing in the UK according to latest research from CBRE.
Average yields for the region’s prime industrial property hit 5.75 per cent in the first quarter (Q1) of 2014. Only London, at 5.05 per cent, outperformed the city. In Manchester and Edinburgh, returns are seven per cent.
According to Ed Gamble, evidence suggests that yields in the city have fallen even further during Q2.
He said: “We have a lot of money chasing limited stock. The occupational market is showing strong growth, so all the fundamentals are there.
“The shift has been dramatic: this time last year we were selling ten year income at eight per cent.”
The improvement in yields has yet to be matched by rental growth. Average prime shed rents in Birmingham are now circa £5.50 per sq ft, compared to £12.50 in London, £6 in Glasgow and Edinburgh and £5.95 in Manchester.
Richard Meering, a senior director in CBRE’s national logistics and industrial agency team, expects them to play catch up soon.
He said: “There is definitely pressure on rents. The £6 per sq ft barrier is already rumoured to have been broken in the region.
“IM Properties did their last deal at Birch Coppice at £5.75 and are now quoting £6 per sq ft for their 152,000 sq ft speculative unit at the same scheme. Other developers are also confident enough to go for £6 and with so little new accommodation available this trend should continue, buoyed by sustained occupier demand, stock shortages and the need to provide new units as design and build.”
Prime city centre office yields in Birmingham are also showing strong signs of improvement.
In Q1 they reached 5.75 per cent, matching Manchester and Edinburgh but ahead of Glasgow (six per cent) and Belfast (7.25 per cent). Only London’s West End (3.75 per cent) and City (4.5 per cent) markets better Birmingham.
Mr Gamble said: “As with industrial property, stock is short and there is a weight of money seeking opportunities.
“Interest is mainly from UK institutions, marking a change from recent years when overseas buyers dominated the market. Confidence is growing in the occupational market, and with limited development and reducing Grade A stock, investors are now factoring rental growth into their appraisals, something we haven’t seen for five years. This will push yields down further in coming months.
“In the last six months we have seen a move in the liquidity of larger lot sizes, as evidenced by the sale of One Snowhill for £125million and Priory Court and Temple Court for £87.5million.
“Several funds are now looking at how they can add value to office product through significant refurbishment. Others are considering development opportunities.”
At £28.50 per sq ft prime rents have been slowly climbing over recent years. Ashley Hancox, a senior director in CBRE’s national offices team, believes rents will soon begin to climb further.
He said: “As the city’s limited Grade A stock is absorbed Landlords are rightly becoming more confident, evidenced by a compression of incentives. As things stand, occupiers already have very little genuine choice; it is only a matter time before we see a bidding war for the best remaining space which history tells us will push up the rental tone for all space within the City core.
Apart from Aberdeen, with its exceptional market based on the energy and sustainability sectors, Manchester tops the regional prime rents table at £30 per sq ft; Edinburgh is on par with Birmingham, while Bristol and Glasgow rents are £27.50 and £27 per sq ft respectively.