Birmingham, UK – Despite a reported outward shift in yields in Q1 2009 at 7.25% (Q4 08: 6.75%), Birmingham can expect to see a stabilisation in the pricing of prime product in the coming months, according to investment experts at Knight Franks’ Birmingham office.
The recent sale of 5 St Philips Place at a yield of 7.00% saw intense competition from three or more cash bidders, which resulted in outbidding and gazumping until the eventual simultaneous exchange and completion of contracts at £31.5 million.
Whilst this deal proved extremely promising for the Birmingham market, Ashley Hudson, investment partner at Knight Frank does not believe the deal represents an achievable yield for the city moving forward.
He explained: ”5 St Philips Place is extremely well let to the Government and three Blue chip corporates, and is in a 100% prime location. There are probably only two other buildings in the city that could provide this income profile, and it is this profile that many of the potential purchasers who are active in the regional market are seeking.
“This has resulted in a multi tier prime market with super prime yields being 7% and a little better, but only for the best in class buildings in the city.
“There is then a second tier prime for modern buildings in 100% core locations such as Colmore Row, but without the long term secure bond type income stream where yields range from 7.5% upwards. Moving away from prime, there is a further yield shift for 90% buildings in 90% locations (such as the city core periphery including Edmund Street and Cornwall Street) and despite these buildings being modern, Grade A and in the central core, there could be a discount of up to 100 base points from the secondary prime level of 7.5% to 8.5%.”
“This climate represents a superb opportunity for investors to acquire very good buildings in very good locations at substantially discounted prices. Looking forward, in an improving market the boundaries between super prime, secondary prime and 90% buildings blur and as demand increases a similar yield can be applied to all three markets and this could provide a significant capital uplift for the purchaser or a 90% building in today’s market.”
With purchasers principally driven by income as they seek to maximise return on cash from assets representing minimal risk, a very good building in a very good core location but with a weaker covenant or a short leasing term will attract a significantly discounted yield. A more secondary building with a very good income stream on the other hand will achieve a better yield.
The downward pressure on rents and drop of headline rent experienced in Q1 2009 is also leading the sophisticated investor to consider purchasing choices more carefully.
Ashley added: “Investors in the city are shying away from buying buildings with headline rents set at the peak of the market, as rental growth will be restricted moving forward. Investors would rather acquire at sensible rents of say £25.00 per sq ft where rental growth is more likely.
“As we move through Q2 2009 the market is seeing more investor interest than in the previous 12 months. The restricting factor on deal flow is as yields start to firm up, vendors are unwilling to sell unless they are forced to and this is leading to an acute lack of stock.
“The signs so far appear to be encouraging with a willingness of purchasers to look at acquiring assets at market prices. This improved interest has resulted in an improvement of yields at the prime end. However, the more secondary market remains particularly moribund as the highly leveraged purchasers are unable to obtain debt and this does not look likely to change in the short term.”
