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Yields stabilizing on UK commercial property market

Prime yields stabilized in January, dropping just 7 basis points: the smallest monthly fall since May 2009, taking the all-sector average to 6.02%. According to Cushman & Wakefield's January Business briefing on the UK property investment market, while renewed falls of the scale seen last autumn are not expected, further declines in some sectors are anticipated in the first half of 2010.

The report suggests that the initial re-pricing of the market was driven by a lack of quality product and increasing awareness that pricing had moved too far. The current stabilization reflects the fact that pricing moved back a long way in a short space of time and we are seeing a pause for breath as the market absorbs the changes seen.

Central London offices are still the main source of good news in the occupational market, with activity and demand up, incentives down and headline rents increasing in the City. With a subdued pipeline, growth projections are being marked up and a period of strong performance is likely.

In the retail sector, better than expected Christmas trading has provided a fillip to the market but this is set against a weak 2008 and the fact that many retailers are not prospering.  Moreover, as temporary Christmas lets are handed back and retailers re-evaluate their trading portfolios, availability will edge up further in some areas.

David Erwin, CEO of UK capital markets at Cushman & Wakefield said: “2010 has kicked off with a bang. Most investment agents have been busier in January than at almost any time since the late 1990's and there will be significant turnover in the next few months. Experienced vendors (including recent buyers) are taking profits whilst purchasers continue to seek stock which broadly remains in short supply. The current dynamics suggest the market is a win-win for buyers and sellers and it will be a busy run in to Easter.”

David Hutchings, head of research at Cushman & Wakefield said: “One of the most notable changes of the past six weeks has been the improving confidence shown towards the occupational market, backed by pressure on rents in Central London as well as a hardening of attitudes towards incentives in a range of other areas. As a result, more investors are ready to look further up the risk curve, accepting shorter leases for example. However, some of the recent improvement is a product of existing tenant demand being fast-tracked as occupiers sense a change in the market as well as by temporary lettings in the run to Christmas. Hence, investors need to maintain a realistic perspective and be looking to price in a stabilization in activity and prime rents rather than an imminent recovery.” (press release)