Cyclical and Structural Components to Yield Movements: The Case of Central London Offices

The central London office markets have entered a period where, in every sub-sector, historically low prime yields have been registered. In more normally recorded market circumstances the phenomenon of mean reversion tendency would be expected to have a moderating impact on yield compression at this stage in the property cycle. However, in London other powerful influences could be neutering the expected reversion to mean principle. Essentially these are: The sheer weight of capital arriving in London from predominantly middle eastern and far eastern sources; the emergence of London as one of, if not the, pre-eminent global safe haven for international real estate investors, and a desire for wealth protection over investment return from large sections of the global investment community.In these circumstances, could London be argued to have developed a large degree of immunity to a number of the traditionally accepted key influences on yield profile? (for example UK GDP growth or relatively modest movements in rental levels). In addition, have some influences risen in their importance and others waned? This research seeks to identify the key impacts on yield profile that have traditionally been recognised; determining if there are any new key impacts; and quantifying the likely degree of influence on net initial yield composition that these component forces have.