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, according to Savills’ latest Commercial Market in Minutes report.
Savills said it 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.
Meanwhile, 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 said the market will have to focus more on income return and rental growth.
The firm suggested this shift is an indicator that the market has moved on as the rate of capital value growth begins to slow from its peak - 12.95% in October 2014 compared to a current level of 11.04% for the year to the end of May 2015.
Mat Oakley, commercial research analyst at Savills, said: “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.”
The report found 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 suggested the industrial sector would see stronger than normal rental growth.