UK Property Risk Premium narrowing in 2014

The previous post looked at yield compression in seven selected European cities, below paragraph explores further what this mean for the sector as an asset class.

Due to changes in the 10yr government bond (UK 10yr gilt) rate and further declining property yields, the risk premium for property has again narrowed to historically low levels in London.

CapG

In 2008 IPF sponsored a survey of 250 UK independent financial advisors asking “ what minimum threshold rate of return would their clients require above the risk free rate from their commercial property investments”

The figure that has come up and seems relatively stable over time is 330bps – 370bps (average 350bps).  What is surprising that this figure is stable throughout the GFC and previous economic cycles.  In comparison long the term risk premium for equities is 4.8%.

In Q3 2014 the risk premium for London City office property was down to 230bps and for West End property at 130bps.

UK risk premia

Source: CBRE

Net Prime Yields (reflect NOI and purchasing costs into account)

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