There has been a lot of commentary this year, including by ourselves, about when we can expect the UK commercial real estate investment market to turn a corner and yields begin to systematically harden. Most experts are predicting that this will be at the point when, instead of holding interest rates steady, the Bank of England begins regularly cutting them, bringing down the cost of debt thereby increasing the pool of investors who can access finance to buy real estate. This, in turn, will give sellers more confidence that now is the time to launch assets to the market, with a bigger pool of buyers ready to compete and thereby securing themselves the best price.
But while the timing of the turn is important, what is equally so, but has been somewhat less spoken about, is the likely speed of the recovery. This is especially crucial for opportunistic buyers whose success or failure can hinge on striking at the right moment before yields move in too far. And what is interesting when looking at previous cycles, is that when commercial property yields harden, they harden fast.
Examining the last two big recoveries in the past 30 years – in 1993/4 post the UK’s 1991 recession and in 2009/10 after the 2008 GFC – what’s evident is that commercial yields hardened remarkably quickly. In the case of the former, taking offices as an example, between August 1993 and May 1994 average UK office yields hardened a full 200 basis points from 7.31% to 5.31% in just 10 months. Moving into the more recent past, UK industrial yields fell from a peak of 7.88% in May 2009 to 6.25% in May 2010.
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