UK commercial property sales reach highest level since the economic downturn

The number of UK commercial property transactions has reached its highest level since the credit crunch, with 115,400 sales in the last year, a 6% jump, according to the latest figures to be made available.

Data from HMRC shows that the number of transactions is up 24% from a low of 92,900 in 2008/2009, but still significantly below 2007/2008 when there were 139,000 sales.

An analysis of the figures by commercial law firm EMW, suggests that England is dominating the country’s market. There were 97,500 commercial property transactions in England last year, accounting for 85% of the UK total, this figure is also the highest since 2007/2008 when there were 115,700, 83% of the UK total.

The report explains that the relatively high yields on property when compared to other investments, continues to attract both UK and, increasingly, overseas investors.
‘Commercial property assets are proving increasingly attractive to investors looking for higher yields in an environment with record low interest rates and this is driving activity towards pre-credit crunch levels,’ said Nick Marshall, principal at EMW.

‘There has also been a surge of interest from overseas investors, with the UK offering investor friendly lease terms. The relative shortage of vacant prime office space in central London is also making the market more attractive to investors,’ he explained.
‘Bank lending has also picked up which has led to more activity in the market and lenders are now happier to fund purchases at higher loan to value ratios. Without higher LTVs, many property investors were finding it hard to get the economics of their investments to work,’ he added.
Meanwhile, according to the latest Commercial Market in Minutes report from Savills, downward pressure on prime yields is set to resume across six sectors of the market while income and rental growth will begin to drive the total return.

Savills expects downward movements in prime yields to return across M25 offices, provincial offices, high street retail, shopping centres, industrial distribution and industrial multi-let, largely driven by a lack of new stock coming to the market.

Also, West End and City office prime yields are at an all-time low at 3% and 4.25% respectively, compared to 3.25% and 4.25% in May of last year.

However, unlike the early phase of the UK’s economic recovery which saw investors rely on an uptick in capital value to produce total returns, Savills says the market will have to focus more on income return and rental growth.

The firm suggests this shift is a clear indicator that the market has moved on as the rate of capital value growth begins to slow from its peak of 12.95% in October 2014 compared to a current level of 11.04% for the year to the end of May 2015.

‘Rental growth is no longer just a London story and while office and retail in the Capital remain at the top, an outward ripple of recovery suggests strong prospects for rental growth across an array of sectors and regions. As we have seen before, this will benefit the South East and key regional cities before the rest of the UK,’ said Mat Oakley, commercial research analyst at Savills.

Supporting this the report says that the majority of the top nine regional cities are already experiencing an upward pressure on prime office rents due to a 10% rise in leasing activity and a 10% fall in availability over the past year.

Furthermore, Savills suggests stronger than normal rental growth for the industrial sector, where take-up was up 40% in 2014, leading to Grade A availability halving in some UK regions.

‘The challenge for investors over the next five years will be finding the asset management and rental growth opportunities that will deliver the best returns. Whilst the best rental growth will continue to come from London, other sectors and regions are also starting to offer solid investment potential however a strong bias toward prime remains,’ Oakley added.