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Where next for UK property yields?

Today’s UK property market is gaining momentum. Just a quick look at IPD numbers shows that the last six months returned 8.8% compared to 4.8% six months before (as at 31 March 2014). Competition for assets is fierce with many Managers on behalf of their clients looking to deploy increasing amounts of capital. In such an environment, yields are falling fast, and in some cases, approaching historic lows. But where next and are they factoring in all the good news, asks Kirtan Patel, Chief Investment Officer of Cordea Savills…

Forecasting property yields is never an easy task, but as an old saying goes, “A good forecaster is not smarter than everyone else, he merely has his points better organised.” In that respect, I list the five points why I expect property yields to fall further:

1. The elevated spread between gilt yields and average property yields stands at approximately 400bp still provides a reasonable level of risk premia for investing in property

2. Rising investor interest/appetite/allocations to real estate – demand from investors has never been so strong and that demand needs to be fulfilled.

3. Improving credit conditions with more banks and new real estate debt investors providing financing is helping to oil the property market with rising investment activity

4. Accelerating rental growth which tends to be under-estimated in an improving economic cycle, which in itself is always revised upwards, remains a fundamental support. All three, the OBR, BoE and IMF have revised upwards their GDP forecasts for the UK economy.

5. Unlike previous property cycles where there was a quantum of development activity, this cycle has been fairly muted, particularly in the regions. Today’s economic recovery is not constrained with a major overhang of prime/quality stock.

It is therefore too early to be taking profits from UK property. However, there is a rising risk that the real estate market can move into expensive (overpriced territory). It all depends on the speed and quantum of activity being condensed in the resulting 12-18 month period.

Some also view forecasting as an art of saying what will happen, and then explaining why it didn't. At least, I can go back to the five points above to see if they were really supporting factors.

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