Commercial property investment in UK holding up despite political uncertainty

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Commercial property investment in UK holding up despite political uncertainty

Commercial property investment volumes in the UK increased by 1% in the first half of 2017 to £27.2 billion despite uncertainty caused by the general election.

However, average prime yields in June remaining static at 4.7% due to ongoing uncertainty, according to the latest analysis report from international real estate advisor Savills.

Savills forecasts that total returns are expected to be around 5.5% for UK commercial property in 2017 and improve throughout the next five years.

Offices being the most popular sector, accounting for 39% of investment in the first half of the year and in terms of location, investment was split 50/50 between London and the rest of the UK.

Savills says that sectors which could still see yields harden slightly by the end of 2017 include food stores, M25 offices, regional offices, retail warehouses, industrial distribution and industrial multi-lets despite economic and political uncertainty.

The report suggests that the continued weight of overseas investment targeting UK property is likely to maintain current pricing while the current gap between yields for prime and average commercial property is currently approximately 160 basis points (bps), close to the 10 year average of 180 bps.

‘UK commercial property is in good health, with investors continuing to be attracted by its underlying strengths, with overseas buyers additionally benefitting from the current currency discount. Indeed, volumes in the first half could have been higher, but have been held back by lack of sellers, rather than any reluctance from buyers,’ said Richard Merryweather, joint head of UK investment at Savills.

According to Steve Lang, director in the commercial research team at Savills, whilst uncertainties from the various worldwide political changes may create some localised volatility, particularly as the reality of Brexit negotiations become more apparent, the higher income returns from UK property look set to maintain its attraction with a wide pool of investors.

‘Indeed, in June we observed that a major US pension fund is looking at a build to core strategy in the UK, looking to make physical improvements or agree new leases in order to move assets into core, demonstrating the willingness for some funds to move along the risk curve in order to access UK stock,’ he said.