Waiting for the market movers - South Wales investment market: yields

8 Nov 2008

Peter Graham, Managing Director at Cardiff based agent Stephenson & Alexander, says that some investors who are keen to progress with a transaction are making an offer and finding that they cannot go ahead with it. "The banks wont let them pay under a 7.5% yield as they are very cautious. They might let you go to 7%, but they will not support you on anything below that" he says. He believes it will probably be the summer before the financial crisis ends.

Graham says that research into investor sentiment conducted by the firm, published exclusively in EG, shows that many are thinking of buying early next year. Yet many remain to be convinced of commercial property’s performance compared with other asset classes (see box). As a result, yields in South Wales are already easing, and stock that would have commanded 5.25-5.5% now achieves 7.5-8.5%. Graham says "that is not on account of the underlying commercial property factors, although it has to be said that values were overstating the true worth of property investments". For example, "absolute top prime" retail stock on Queen Street in Cardiff is now achieving 5.25% from a peak of 4%. "We have never heard of yields of that level" says Graham.

Overseas Trusts

But where are the buyers? Cash-rich overseas investors regard Wales as attractive says Graham, but as yet they appear reticent to commit. The pension funds are not buying, despite holding a lot of money, and only a handful of overseas trusts and wealthy private investors have been able to push sellers on yield.

How Do Buyers Feel?

Cardiff based agent Stephenson & Alexander asked 100 property players across the UK how they felt about investment. The findings, exclusive to EG, are shown below:-

• Compared with 2005, the average maximum lot size is now up from £13.89m to £20m, posing problems for the Welsh market, which tends to have smaller lot sizes.
• The most popular lot size for the Welsh and M4 locations is £2m-£20m per property purchase, with a third of respondents now seeking investments of £2.5m or less.
• Average lowest net initial yield was 6.16-6.36% in 2005. Now it is 6.5-7%.
• Those buying are concentrating investments mainly in Cardiff.
• More than 50% of UK investors wish to acquire now, while a third wish to acquire in second half of 2009.
• Interest is spread across sectors and equally between South Wales, the M4 and central London.
• Typical yields sought are: 7.5-8% for offices and 6.7-5% for unit shopping, despite prime still being at or around 5%. Retail warehousing is popular at yields of 6.75-7.5%, as is industrial generally at 8-9% yields.
• Most investors have a debt-to-property value ratio of 60-70%.
• Short leases are out, with many investors seeking a minimum return requirements as wide as 6.5-9%, and longer leases of 14-15 years and more.

South Wales investment market: yields

Yields have moved out significantly in every sector of the market

	June 07 (%)	Dec 07 (%)	June 08 (%)	Sep 08 (%)
Offices
Prime, new, Cardiff (F)	4.75	5.00%	5.75%	6.25%
Swansea, Newport, new (F)	5.25	5.75%	6.5%	7%
Industrial
New, Cardiff M4 corridor, prime (F)	6.00	6.50%	6.75%	7.5%
Swansea, Bridgend, new adjacent M4	6.75	7.00%	7.25%	8%
Retail
Absolute Prime, Queen Street, Cardiff (F)	4.00	4.50%	5.00%	5.25%
Suburban Cardiff, local covenant (P)	6.50	7.00%	8.00%	8.5%
Swansea, Newport, prime (F)	4.50	5.00%	5.50%	5.5% - 5.75%

Source: Stephenson & Alexander

Note: This yield table is intended as an indication of equivalent yields achievable and adopted in the valuation of properties let at market rental values. These are not initial yields, which would apply at lower levels to properties where the rent is reversionary. Individual property types, their location and other factors such as covenant strength, will determine the Yield for a specific property.

The yields are for investments let on long leases to good quality covenants unless otherwise stated.

F = Fund Purchaser

P = Property Company Purchaser