UK Property Yields To Rise Further

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An opportunity starts to open up in the UK property sector, says Knight Frank Investors.

Knight Frank Investors
The property sector will face rising yields due to a lack of debt and falling (albeit modest) rental values as low investment levels are reflected in weak economic growth and, in turn, weaker occupational demand.

The UK Commercial property market appears to be too complacent about the possible effects on pricing of the recent Eurozone crisis.

Contrary to many commentators, Knight Frank Investors’ view is that the remainder of the year will see the UK property investment market caught in a pincer market.

The property sector will face rising yields due to a lack of debt and falling (albeit modest) rental values as low investment levels are reflected in weak economic growth and, in turn, weaker occupational demand.

The recent tonic to markets – both the property sector and further afield - following the latest European summit already appears to be wearing off.

Furthermore economic news elsewhere is sobering; the US economy is growing more slowly than expected and the same applies to China.

Any economic forecast older than six weeks already looks hopelessly optimistic, Knight Frank Investors expect further downward revisions to GDP in the coming weeks.

All this matters to the prospective returns from commercial property. Knight Frank Investors expect a negative total return (circa 2%) by the end of 2012 and the property investment return for 2013 could at best be fairly dull. Much depends on the policy response.

As mentioned in our latest Moving Markets presentation for the property investor with capital, this will present an opportunity to invest at historically high yields (low capital values). This is undoubtedly a good place to start, since investing at yields above the long term average is a good predictor of strong future returns from commercial property. Simply put, and all other things being equal, the cheaper the purchase price the better the subsequent return that the property investor can expect.

Paradoxically the increase in short term risk should sustain prime commercial property yields in London which remain low risk and offer significantly better investment yields than bonds.

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Gareth McConnell
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