Big yields movement
The slide in commercial property values has created possibilities for investors with cash – the ‘deal value zone’ – described by Lambert Smith Hampton (LSH) as a point in the market where property yields are above finance rates. The trend is supported by news that the average yield on transactions moved out by 83 basis points in the first quarter of 2008.
Published recently, LSH’s ‘UK Investment Transactions’ (UKIT) Q1 Activity Survey shows that commercial property yields now exceed finance rates for the first time in more than eighteen months – generating attractive opportunities for cash-rich investors.
Ian Leather, head of LSH’s Northampton office said: “The yield movements have created some very interesting opportunities for investors, and we are starting to see well financed private property groups, UK Life Funds and oversees investors pick up some excellent deals. Although yields are up in all key sectors, the best market for investors is industrial where yields are running at 7.26% – a level not seen in years.”
The good news for investors is counterbalanced by evidence that the total volume of transactions was down almost 50% on the last twelve months. The report indicates that overall transaction levels remained broadly in line with the final quarter of 2007, with £7.3bn of transactions reported compared to £7.8bn in the fourth quarter of 2007.
LSH’s research shows that the ‘deal value zone’ is being fuelled by good quality stock being released onto the market by institutional investors forced to make sales to release much needed funds. As a consequence of this activity, the average yield on transactions moved out by 83 basis points in the first quarter of 2008. With industrial yields now averaging 7.26%, the sector has the greatest margin over finance rates. The positive yield gap on both office and retail sectors is approaching 100 basis points, indicating the levels of value that have returned to the market.
Many transactions are now taking place at levels of 7.0% and above, taking returns within the ‘deal value zone’ and any further movements in yields will only serve to make the market more attractive for investors.
Ian added: “The sharp upward shift in transaction yields in the first three months of 2008 has pushed the market back into a cash positive position against mainstream interest rates. It does make for a more interesting market for those with cash since accessing debt is highly selective. Overseas buyers, particularly the German Funds are seeing great value at the quality end of the market and with the Euro 20% stronger than 12 months ago the UK is fast becoming the focus for European money.”.

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