The rise of online shopping is driving up returns for industrial property investment, reveals new research from CBRE.
The firm’s latest report shows “very strong” commercial property investment returns at the end of 2016. Returns reached 1.1 per cent in December 2016, taking the year’s total to 2.7 per cent. Industrial property, though, led the pack, with a total return of 7.2 per cent.
Overall in 2016, all Property capital values fell by 2.4 per cent, which CBRE attributes to both March’s stamp duty tax changes and June’s EU referendum. The Industrial sector outperformed all other sectors in December too, with a 1.4 per cent increase in capital values, the sector’s highest monthly growth for 2 years. The Office sector also recorded a strong performance in December, rising by 0.5 per cent over the month.
UK commercial property rental values grew slightly in December, rising 0.2 per cent over the month. Retail sector rental values held firm for a second month while the Office sector recorded an increase of 0.3 per cent, driven by offices outside of London and the M25 (0.7 per cent). Rental values were flat across Central London offices. Industrial rental value growth also outperformed in December, at 0.5 per cent.
“The traditional end-of-year surge in property markets delivered some good news in monthly valuations, with growth across the board during December, in contrast to the somewhat unstable summer and early autumn. Industrial property made a major contribution to overall averages in 2016, reflecting the continued growth of online retailing,” comments Miles Gibson, Head of UK Research at CBRE. “With less than a year’s supply available in ‘big box’ logistics property, we predict it will do so again in 2017.”
UK commercial property to remain attractive to investors in 2017
19th December 2016
The UK’s commercial property market will continue to look attractive to investors in 2017.
Despite the ongoing political and economic uncertainty, as the UK negotiates its future relationship with the European Union, CBRE predicts that the Brexit will be “far from the only factor” in the country’s real estate appeal. A weaker currency and a tighter labour market will mean inflation now becomes a much a more prominent risk factor, which markets are already pricing in, notes the firm.
“The UK’s economic fundamentals remain strong. The UK ends 2016, and enters EU negotiations, with an economy growing at around 2.1 per cent, record levels of employment and surprisingly high business and consumer confidence,” explains CBRE’s research. “While CBRE does expect 2017 to be weaker – not least as unemployment reaches record lows – its forecast is for continued GDP growth over the next two years at 1.5 per cent in 2017 and 1.3 per cent in 2018. This growth will be reflected in occupier demand for property.”
CBRE’s all-property returns forecast is 1.1 per cent for 2017 with income moving to the fore as the main contributor. The firm forecasts that after an initial year of caution, total returns will recover to healthier levels of around 6-7 per cent from 2018 onwards, as recent capital value falls are reversed.
“Returns will outperform in those markets short of supply (such as industrials and residential) and those markets with drivers less affected by Brexit (such as healthcare and student accommodation),” says CBRE. “These emerging sectors are likely to experience even strong investor interest than an already-strong 2016.”
Slowing employment growth will tip the balance of supply and demand in office markets, with rental growth faltering in some markets. Stronger than expected retail sales and consumer confidence will send retail into 2017 in good heart. However there will be no let-up in the need for retailers to adapt to a changing retail environment, with higher inflation, business rates revaluation, relentless technological innovation, and growth in e-commerce piling on the pressure.
2016’s stand-out has been industrial property, adds CBRE, which forecasts another strong year for the sector in 2017. Investors and occupiers will be on the look-out for specific Brexit impacts, particularly from inflation and uncertainty over the trade outlook – as well as taking the upside of the continuing retail revolution.
“We actually expect to see some sectors such as industrial property out perform in 2017,” comments Ciaran Bird, UK Managing Director, CBRE UK, “While housing and newer asset classes such as healthcare and student accommodation will become more prominent on investors’ wish lists.”
Business as usual for smaller commercial property investors
7th November 2016
The UK’s vote to leave the EU may still be hanging in the air, but it is business for smaller investors in the commercial property sector.
Lower valuations, softening yields and the scarcity of investment transactions in the months following the referendum suggested that the impact of the result was widely felt across the commercial real estate industry, but private investors and SMEs remain as keen on commercial real estate as ever, reveals a new report from NatWest.
Indeed, domestic institutional investors have reduced their acquisitions, investing £1.4bn in Q3 2016, a third of the amount they spent in the equivalent period last year, while REITS have invested 60 per cent less than in the same quarter last year.
Smaller investors, though, have found that any impact of the Brexit vote are “negligible”.
According to NatWest, the value of commercial property investment recorded by Propertydata was down by a third in Q3 relative to 2015, but the number of transactions recorded by HMRC was almost exactly the same, “a picture corroborated by evidence from the auction rooms”.
Indeed, commercial real estate still retains its appeal, thanks to auction lots such as a retail unit let to Greggs until 2031 yielding 5.9 per cent – a far stronger return than the 3 per cent available from most investment grade corporate bonds or high yield bonds offering 5 per cent.
“Much expectation has been placed on overseas investors to drive acquisition activity, motivated by the sharp decline in Sterling. Although investment from overseas was down 25 per cent year-on-year, it has been far stronger than in the run up to the vote, suggesting that Sterling weakness is acting as a counter-balance to political concerns,” says NatWest. “They will be a key factor in determining the level of market liquidity, particularly in Central London where they accounted for 70 per cent of Q3 investment.”
Moodys confirms positive outlook for UK commercial property
29th September 2016
Ratings agency Moodys has confirmed that it has a positive outlook for the UK’s commercial property market.
Political uncertainty is seen as the biggest risk for the commercial real estate (CRE) industry in the next two years, according to its latest poll of investors, issuers and credit professionals.
The survey arrives after the UK’s decision to leave the European Union, a surprise vote that has prompted many to forecast negative impacts upon the UK’s real estate market. After an initial slowdown in activity, though, agents are beginning to report returning buyers to the market, while foreign investment has also been encouraged by the currency’s weakness.
In the commercial sector, Moodys says that political risk will keep market uncertainty high, but that “commercial property sector fundamentals will remain robust” in Europe, although a weaker macro outlook would take the steam out of the UK commercial property market.
“While we expect slower economic growth in the UK as a consequence of Brexit, we do not foresee a recession or – perhaps most importantly – a sharp increase in unemployment,” Reuters quotes the report as saying.
If unemployment remains below 6 per cent, employment growth is expected to remain strong, boosting demand for office space as well as residential proeprty, although Moodys cautions that London’s prices could be hit if companies decided to relocate their offices to elsewhere.
“We expect those roles to take many years to migrate and total numbers may be relatively small, given that employment in London has increased by roughly 35,000 a quarter since 2012 despite a somewhat subdued economic recovery,” adds the report. “In our base case, we see UK prices remaining broadly stable overall, but expect price decreases in particular instances of up to 10 percent depending on property type, quality and location.”
Fundamentals of UK retail property drives investment to £1bn
9th August 2016
The UK retail market is still “underpinned by strong fundamentals”, says CBRE, as investment hits £1bn in the first half of 2016.
The UK’s vote to leave the European Union has prompted much speculation and uncertainty about the country’s economic growth, the pound’s value against other currencies and property prices, but the UK retail sector shows signs of being a safe haven for investors, says the advisor.
Investors acquired £1bn of Central London prime retail roperty in the first half of the year, with the market proving a safe haven before and after the vote to leave the EU – higher than the H1 average of £700m seen in recent years.
Investors continue to regard prime Central London retail as being relatively protected from the macroeconomic headwinds that have caused nervousness in other markets. London shops have proved particularly attractive to overseas investors, who represented 60 per cent of volumes between January and the end of June 2016.
The market has seen such notable deals as the £65 million sale of 169 new Bond Street at a record of £18,800 per sq ft, the highest capital value per sq ft paid for any UK retail asset to date. June also saw the sale of Debenhams’ Oxford Street flagship store in one of the biggest deals since the referendum.
“These investors are benefiting from recent falls in sterling, while also taking reassurance from the boost sterling depreciation will have on spending from overseas visitors,” says CBRE’s report.
Phil Cann, Head of UK Retail at CBRE, says: “London shops have been seen by many as the ultimate safe haven investment, with buyers bucking the ‘wait and see’ trend we have seen in other sectors. The strong H1 investment volumes are even more remarkable when considered against the backdrop of uncertainty created by the EU referendum and what is normally a typically slower first half.”
The advisor expects investment to swell “significantly” in August, with £450 million worth of deals set to complete this month.
Debenhams flagship Oxford Street store sold for £400m
11th July 2016
British Land has sold Debenhams’ flagship Oxford Street store for £400m.
The seven-storey building, located near Bond Street Underground Station in London’s core West End shopping district, is one of many retail assets owned by the company. Indeed, British Land is the UK’s largest listed owner and manager of retail space, with retail assets accounting for 50 per cent of its commercial property portfolio.
The deal was announced at the end of last week, with contracts for the sale of 334-348 Oxford Street exchanged with a private investor. The building is let in its entirety to Debenhams until 2039. The Times reports that the anonymous buyer is thought to be Sweden’s richest man, Stefan Persson, who is chairman of the fashion chain H&M.
What is certain is that at an estimated annual return of 2.75 per cent, the deal is one of the most expensive in the capital since 2008. Indeed, the deal arrives at a time when confidence in the commercial property sector has been shaken by the UK’s vote to leave the EU, with some fearing that asset prices will fall.
However, British Land appears as confident as ever in the market. The company has exchanged on £99 million of further retail disposals since 31 March 2016, including £79 million of superstores, 3.1 per cent ahead of March valuations. Since the EU Referendum, meanwhile, British Land has exchanged 11 long term retail leases, totalling 50,000 sq ft and £2.1 million of rent, on terms agreed prior to the Referendum. The leases are spread across regional and local portfolios to a range of occupiers including Yo! Sushi, Nando’s, River Island, Pret A Manger, Byron and Waterstones. In aggregate, these lettings are 4.7 per cent ahead of March 2016 ERVs.
Chris Grigg, Chief Executive said: “The disposal of Debenhams on Oxford Street reflects our strategic focus on multi-let assets within the retail portfolio. British Land has entered this period of post-referendum uncertainty in a robust position. We have a strong, resilient business with a clear strategy. We have a modern portfolio which is well suited to current and future customer needs. The portfolio is 99 per cent occupied with a wide range of quality occupiers on long leases.”