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UK commercial property investment volumes rise

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21st Jul 17 10:08 am

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Despite additional uncertainty caused by an unexpected General Election, UK commercial property investment volumes rose 1 per cent in the first half of 2017, with average prime yields in June remaining static at 4.7 per cent due to ongoing uncertainty, international real estate advisor Savills reports.

Investment volumes into UK commercial property in H1 2017 reached £27.2bn, one per cent higher than the same half in 2016, according to Savills, with offices being the most popular sector, accounting for 39 per cent of H1 investment. In terms of location, investment volumes in H1 were split 50/50 between London and the rest of the UK.

Savills says that six sectors could still see yields harden slightly by the end of 2017 (foodstores, M25 offices, regional offices, retail warehouse (restricted), industrial distribution and industrial multi-lets), despite economic and political uncertainty, as the continued weight of overseas investment targeting UK property is likely to maintain current pricing  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.  

Richard Merryweather, joint head of UK investment at Savills, says: “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 H1 could have been higher, but have been held back by lack of sellers, rather than any reluctance from buyers.”

Steve Lang, director in the commercial research team at Savills, adds: “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.”

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

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