Prime Rent and Yield Monitor Shows Rental Falls are Slow as Prime Yields Harden
London, 12 October 2009 – The decline in average prime yields accelerated through Q3, with 45bp coming off the All Property prime yield according to the Q3 2009 CB Richard Ellis Prime Rent and Yield Monitor.
This was evident across all sectors, but especially marked in the retail warehouse sector, where yields contracted by 60bp. Bulky retail warehouses fell 90bp over the quarter, the largest reduction seen across all property sub-sectors.
The imbalance between supply and demand in the investment market helps explain the rapidly declining prime yield in quarter 3. Demand for property has been boosted by both a notable return of institutional investors and others now seeing value in UK property after the hefty corrections in prices over the past 2 years. There is also a restricted supply of quality prime property with secure income on the market.
Prime rents have fallen by 12.3% over the past year, and 13% from their peak in Q2 2008. Central London offices have seen the steepest decline, with the City and West End markets seeing falls of 33.7% and 28.3% over the year, and -36.5% and -35.5% from peak to trough. Shops have undergone a similar downturn in rental values to the 1990’s, although retail warehouses have fared worse.
Peter Damesick, Head of UK Research at CB Richard Ellis, commented: “There has been a marked change in investor sentiment in recent months which has translated into significant downward pressure on yields for good quality assets with secure income. Investor demand will be bolstered by the perception that the worst of the rental falls are now behind us, at least at the prime end of the market, although in the wider secondary and tertiary markets occupier weakness will continue to affect rents in 2010.”
Q3 2009 Prime Rent & Yield Monitor:
• The CB Richard Ellis All Property average prime equivalent yield moved in by 45bp in Q3 to 7.2%.
• Retail warehouses were again one of the largest contributors to the total yield compression, with prime yields coming in by 60bp in the quarter, to 7.5%.
• Bulky retail warehouses saw the largest improvement, with yields coming in by 90bp over the quarter, and 130bp over the past 2 quarters.
• All Property rents fell 1.4% in the third quarter, pulling prime rental growth down 12.3% for the past 12 months.
• Prime rents in Central London offices were less affected than expected, falling by 1.6% over the quarter.
• All Shop rents fell further in Q3, although the decline was considerably checked, falling by only 1.9%, compared with 6.2% in Q2.
• Industrial rents fell by 1.1% in Q3 2009, again following the wider market trend of slowing rental declines.
• The positive yield gap between property and gilts narrowed to 360bp in Q3.