Average UK prime yields sharpened to 4.79% in February 2017, with the UK now in the longest sustained period of decreasing yields since early 2014.
In addition, Savills latest research found that the sale of a number of trophy real estate assets across the UK during Q1 means investment volumes for the first three months of this year are set to comfortably exceed the long term average of £9.8bn.
The key driver in yields was in the City Office market which dropped to 4% in February due to falling supply and continued demand from investors. The research estimates that there is currently £2.7bn of stock currently under offer in the City.
Downward pressure was also visible in the South East and Regional Office markets, where yields currently stand at 5.25%, due to increased activity by overseas investors who amplified their exposure to the UK’s regions to account for 29% of total regional investment volume in 2016, the highest level since 2012.
Mark Ridley, CEO of Savills UK and Europe, said: “We are currently seeing steady investment volumes across all markets, but one of the biggest barriers to liquidity is the lack of investment stock currently being considered for sale. With very little speculative development in the office or logistics sector and continued occupational demand, pre-let fundings or refurbishment opportunities will push investment volumes forward.”
Overseas investors have been particularly active this quarter having deployed £5.8bn into the UK’s regional commercial property market in 2016, growing to account for almost one third (29%) of the total investment outside of London with particular interest in Edinburgh, Manchester and Cardiff. This was a rise from 27% in 2015 and 10% above the long term average of 19%.
There has especially been increased prevalence of European investors in regional markets who accounted for 32% of overseas investment in the regions, with German investors accounting for almost half of this. Key deals include AGP funding the St James Quarter in Edinburgh and Deka Immobilien acquiring One St Peter’s Square in Manchester.
Kevin Mofid, director in the commercial research team at Savills, added: “Overseas investors have been increasingly active in the UK’s Regional Markets, with European buyers, particularly those from Germany, being especially busy. Investors are set to continue to focus on the regions for the foreseeable future as total returns in some regional office markets are predicted to outperform many Central London sub-markets over the next three to four years.”
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