Property’s Yield Gap over Bonds Falls to 100bp. Following a modest decline in Q1, All Property rents were broadly flat in the second quarter of 2008 and over the first half of the year.  However, a loss of momentum in the UK occupier markets has meant that annual rental growth has slowed from 7% in Q3 to just 1.7% this quarter.

With ongoing turbulence in the financial sector it is unsurprising that All Office rents fell for the second consecutive quarter.  However, shops rents continued to show some growth.

Investment into UK commercial property fell once again in the second quarter.  Just under £5bn was transacted in the three months to June compared to more than £17bn in the same period last year.  Declining activity helped push the average prime yield out by 30bp over Q2, a faster out shift than the previous quarter.

Over the last year, average All Property yields have risen more than 130bp from a low of 4.8% in Q2 2007. At 6.2%, the prime equivalent yield is now back to the level recorded in Q2 2004. Over the quarter, All Offices saw the largest upward shift in yields, while Retail movements were more muted.

The positive property yield gap narrowed in Q2, despite a rise in the All Property yield.  Higher inflation, with CPI of 3.3% in May, and expectations that this will rise to more than 4% in coming months, forced a sharp reversal in the UK interest rate outlook.  Benchmark gilt yields correspondingly raised more than 80bp in the quarter.

Full PDF below:

UK Prime Rent and Yield Monitor - Q2 2008 PDF