Commercial property is repricing fast, and price discovery is happening "more quickly than ever before" in a falling market, Savills reported.
According to Savills' monthly UK Commercial Market in Minutes, recent economic and political turmoil has seen average prime yields move out in all sectors between September and October 2022, by between 0.25% and 0.75%. The only exception is City offices which have stuck at a prime equivalent yield of 4.25%.
The rise in prime industrial logistics yields is 1.75% since May 2022, with an 0.75% movement to 5% in between September and October.
Average prime yields as a whole have moved out 50 basis points in the last 12 months, Savills said.
Savills' director of research Mat Oakley said that admitting that prices need to move is a "good thing". He added that the adviser thinks the market is still running the risk of entering a sustained period of lower levels of activity because of either "fear, greed or confusion".
Oakley said opportunistic investors in direct assets and debt "appear to be rubbing their hands with glee at the market turmoil" and possibility of forced sales. But he warned that they could be disappointed if they are too aggressive on the scale of discount that they are looking for.
He compared the situation to the febrile atmosphere after the Brexit referendum period when some investors were looking for 40% price reductions, but typically failed to secure a reduction that big.
Oakley added that vendors that are hoping that this time next year everything will be fine will probably be disappointed as the higher cost of borrowing is here to stay. He added that higher energy prices are also likely to remain a fact of life for the next five years.
Savills argued this does not mean that prices necessarily have to keep falling until yields are higher than the cost of debt. Oakley points out that a review of the spread between the prime West End office yield and the yield on a five-year gilt shows that for much of the 1980s and 1990s the market functioned "perfectly well" with a reverse of the spread seen in the 2000s.
"There is no reason why once we have adapted to this new funding environment that market activity should not return to ’normal’," he said.
Savills remains optimistic about the outlook for the office and logistics occupational markets in particular. The factors that have been driving their continued resilience are still in place, it says, pointing to an "undersupply of prime space and a contracting development pipeline that will not alleviate this undersupply".
Savills also points out that the actual level of completions in 2025 and beyond is likely to be substantially lower than had been expected, which in turn will drive stronger-than-expected rental growth.