Snap general election could see investor focus switch to second half of 2017

26 April 2017

The next two months of the year could see less than normal activity in the UK investment market, followed by heightened volumes in H2 as investors hold out making decisions until after June’s general election, says Savills.

The international real estate advisor says that in three of the past five election years (1997, 2010 and 2015) the Savills All Sector Prime Yield ticked up by a quarter of a percentage point in May/June, before reverting to pre-election levels within three months of voting day. 2017 could follow this pattern, says Savills, although given international investors’ perceptions of the UK as a safe haven in the context of global geo-political uncertainty and the currency discount currently available UK property, any drop in confidence could be less pronounced and the period of uncertainty shorter than in previous election years.

Q1 2017 saw a record level of nearly £5 billion transacted in the London office market, according to Savills, 84% if which involved non-domestic investors.

Mark Ridley, CEO of Savills UK and Europe, says: “With the announcement of June’s snap general election arguably uncertainty in the UK has risen again. However, the story around transactional activity and pricing in general election years is far from conclusive, and the election this year takes place against a very different global backdrop to that of 2010 and 2015. The election may have a short-term effect on confidence, but it’s unlikely to last. Indeed, June 2017 may be a good time to buy.”

Savills latest Market in Minutes report does note that UK secondary and tertiary yields are more likely to be affected by domestic uncertainty. It notes that the spread between national prime and secondary yields has widened from its recent low of 316 basis points (bps) to 355bps. This is above the long-term average of 326bps, pointing to a mix of increased caution around secondary assets, although risk remains significantly lower than during the global financial crisis (GFC). The spread between prime and secondary yields in the regional office markets is also wider than average but, again, significantly narrower than during the GFC, says Savills.

Mat Oakley, head of UK and European commercial research at Savills, adds: “Looking ahead, we do expect to see weaker investor demand for short income deals as concerns about demand and rental growth rise, and a greater degree of caution is applied to their evaluation. In turn, secondary yields will also rise until they start to look cheap in relation to the occupational risk. However, the ceiling for secondary yields this cycle is definitely lower than it was in 2007- 2012, although the highest returns will once again be from turning short income into long income.”

 
 

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Mark Ridley

Mark Ridley

Chief Executive Officer
Savills UK & Europe

Savills Margaret Street

+44 (0) 20 7499 8644

 

Mat Oakley

Mat Oakley

Director
Commercial Research

Savills Margaret Street

+44 (0) 20 7409 8781