Demand from overseas investors for UK commercial property is driving recovery in the investment sector, according to Lambert Smith Hampton (LSH).
The property consultancy's latest market research reveals 'the highest level of activity in two years', based on a UK-wide investment turnover of £8.3bn in the second quarter of this year. Some 15 of those deals were worth more than £100m, accounting for £3bn of the total turnover.
Although overseas investors have replaced UK institutions as the most active investors in UK commercial property, the story in Scotland is different - with institutional investors still the dominant buyers. This is reflected in ING's acquisition of 180 West George Street Glasgow for £17.5m and SWIPP's purchase of 145 St Vincent Street for £11.8m. Both purchases reflect a net initial yield of 6.6%.
A "small recovery" has been detected in the lending market, illustrated by the return of UK REITs and the quoted property sector.
Bill Binnie, head of investment for LSH in Scotland, said: "After a period of increased activity at the start of 2010, which has resulted in a swift adjustment in values, the market is expected to go through a period of consolidation as it finds its new level. There have been significant changes over the past 12 months.
"Transaction yields have fallen by almost 150 basis points on average, with the retail warehouse and distribution sectors seeing adjustments of up to 250 basis points. The market needs to take some time to allow investors to become accustomed to the new levels of return."
So far, yield improvement has been focused on prime assets, with secondary property values still languishing in some cases at levels set near the bottom of the market. Binnie predicts that this is likely to remain the case until investors become more confident about the underlying strength of the economy.
"This may take some time to be established and fears of dipping back into recession does nothing to help investor sentiment," he said. "There is still uncertainty amongst investors about the government's new age of austerity, and the impact it could have on the economies fragile recovery. However, property is still regarded as an attractive asset and, with yields of almost 6.5%, offers a favourable return when compared to returns from both the equity or bond markets.
"The pace of recovery has taken a number of investors by surprise and arguably been too much too soon and therefore the opportunities for further uplifts over the remainder of the year will be harder to achieve."
www.lsh.co.uk
