Is Now the Right Time To Buy UK Commercial Property?
Pricing for UK commercial real estate may be as "good as it will get" for some time for buyers, Savills says, as the sustained weakening in prices in recent months is coming to an end.
Savills says July has pointed to a "temporary pause" in yield softening. Nearly all sectors' prime yields shifted upwards by 25 basis points in July, with the exception of food stores and West End and London City offices, as prices continued to soften.
The adviser says the average prime yield moved to 6% in July, 20 basis points higher than the previous month, 25 basis points higher than the long-term average, and more than 100 basis points higher than 12 months ago.
Savills says the ongoing price falls are clearly linked to the UK's recent economic performance. But it says the outlook at the beginning of the year was particularly austere and moving into August, it can be argued that some of these negative concerns have "significantly dissipated".
It writes: "A UK recession is no longer the consensus view; good news for both corporate and rental growth. By comparison, average prime yields are still significantly below the 7.25% average reached at the peak of the [global financial crisis] in January 2009."
Savills does not anticipate any yield compression in the short term, but does expect only three sectors will move upwards in the coming months.
"This suggests that for the investor, at least, pricing may be as good as it will get for the time being," it adds.
The Bank of England on in August announced a further 25 basis point increase in interest rates for August, reaching 5.25% for the first time since 2008.
Savills says the negative impact of 13 consecutive interest rate rises appear to have been relatively minimal but it does not believe that this consumer resilience can last in the face of more rises in the cost of money.
It adds clarity is needed on whether the changes the Bank started implementing last year are impacting the wider economy and starting to bring inflation down.
At £13.4 billion there has been a 54.6% reduction in first-half transaction volumes versus H1 2022, which is the worst figure since the peak of the pandemic.
Deal volumes have been slowing since Q2 2022 with much of the slowdown driven by what Savills terms "mismatched seller-buyer expectations", with fewer vendors willing to sell at current pricing unless they have to.
Looking at the industrial sector, Savills says that despite falling back to pre-COVID averages, requirements suggest that take-up will rise in the second half in the UK logistics market. At a national level, take-up for the half year has reached 12.49 million square feet across 56 separate transactions, which is the lowest first-half take-up since 2013, 1% down on the pre-COVID first-half average.
