5 minute read time
A closer look at the latest data from the commercial property market.
Commercial property returns
- Investment research firm MSCI reports that, on average, commercial property values rose by 0.7% in March, a growth rate that would normally signal a market in robust health. However, exceptionally strong value growth in the industrial sector is masking weakness elsewhere.
- Industrial values have risen by 4.1% in the first three months of the year, and by 8.7% in the 12 months since the full impact of the pandemic was first felt in the UK. Growth has been strongest in London, but has also been robustly positive in every other region.
- Average retail values continued to fall in March, even though tentative signs of recovery in the retail warehouse sector have reduced the rate of decline in recent months. In contrast, shopping centre values continue to fall sharply, and are down by 7.1% already this year, following on from a 25% decline in 2020.
- Office values have been drifting downwards, with most regions seeing a decline in Q1. The outlier has been eastern England (+1%), which seems to be almost entirely driven by investor demand for science parks around Cambridge. In contrast, values in the Midlands and Wales are down by 3.5% so far this year, and by 9.1% in 12 months.
Capital growth to end of March 2021 (%)
Investment market activity
- £4.2bn of investment deals transacted in March, the strongest month so far this year, and broadly in line with last March, in the run-up to the first lockdown. Across the first quarter as whole, £10.8bn was transacted – just 7% down on the same period last year.
- The numbers for the first quarter have been bolstered by a very active industrial market, with transactions running at almost twice the level of Q1 last year. In March, Blackstone acquired a 1.6m square-foot portfolio from InfraRed for £187m, and Bedfont Logistics Park from BlackRock for £119m, both for its Mileway logistics platform.
- The London office market has been relatively quiet, but remains in demand from overseas investors. A Hong Kong consortium led by Wing Tai acquired Deloitte’s City office for £255m (4.1%). Henderson Park acquired the asset for £100m in 2018 after Deloitte vacated, before refurbishing it and re-letting it to them on a new 15-year lease.
- Following on from three significant transactions in the student sector in February, a Qatari investor acquired a portfolio of eight assets from the Unite Group for £133m. The price tag represents a yield of 6.5% from 2,284 beds in Birmingham, Wolverhampton, Exeter and Manchester.
- With transactions totalling almost £700m, the retail sector had what passed for a reasonably active month by recent standards. However, after three trades on Bond Street and Piccadilly for a combined £208m, and £213m spent on supermarkets, there were slim pickings elsewhere. The largest of those deals was a portfolio of long income retail warehouses, sold by LondonMetric for £41m.
Investment by sector (£bn, Q1 2021 vs Q1 2020)
Source: Property Data
- Real estate consultancy Knight Frank reports that sentiment for high street retail and shopping centres remains firmly negative, with the sole exception of Bond Street, seen to be stable at around 2.75% following two significant transactions in March. However, just around the corner, Oxford Street yields have moved out by 75 basis points (bp) in 14 months and are expected to soften further.
- In contrast, the retail warehouse sector has seen something of sea change in sentiment, with Knight Frank reporting that multiple benchmarks moved in over the last month. Yields for prime solus units (with 15-year income) have hardened by 25bp, as have secondary parks, with the latter perhaps influenced by perceived alternative-use values.
- Investors have increasingly been drawn to supermarkets, which have seen sales boosted during the pandemic. Yields for assets with RPI leases hardened by a further 25bp in the month to 3.75%; in from 4.5% at the start of the pandemic. Yields for stores with open-market reviews are in by 25bp in the last year and are expected to harden further.
- Sentiment on the economy has improved materially, yet the scope for yield compression has been reduced by a significant rise in market interest rates. In six months, the benchmark 10-year gilt yield has moved out from less than 0.2% to around 0.8%. Five-year swaps are up from 0.18% to 0.68% over the same period.
- Auction rooms have turned out to be a rare source of liquidity for shopping centres in recent months, typically run alongside a private treaty sale process to access the widest possible pool of investors. These sales are setting new benchmarks for pricing that are finally giving valuers some comparables with which to work.
- The Loreburne shopping centre in Dumfries was sold to a Manchester developer for around £3m at the Allsop auction in March. Allsop’s May book lists a further three centres, in Kidderminster, Huddersfield and Widnes, all with guide prices of less than £3m and indicative yields above 25%.
- The latest IPF Consensus Forecast, compiled between December and February, showed a marginal improvement in expectations for 2021, but this was balanced by a reduction in the growth forecast for 2022.
- The average forecast from 24 contributors was for capital values to decline by 2.5% this year, followed by growth of 1.8% in 2022. The decline this year is expected to be driven predominantly by retail subsectors, but the consensus was also that office values would fall this year, by 3.1%. In contrast, industrial values are expected to rise by 4.3%.
- Within retail, shopping centres are once again expected to underperform, with an average predicted decline of 13.1%. High street shops are not expected to fare much better, with a consensus forecast decline of 10.9%. Retail warehouses are forecasted to record a slightly milder 7.2% decline.
- Healthy growth is anticipated for the office and industrial sectors in 2022/23, supported by improving rental growth. In contrast, shopping centre values are expected to fall by a further 5%. Retail warehouses are anticipated to bottom out in 2022 and return to growth in 2023.
This document has been prepared by National Westminster Bank Plc or an affiliated entity (“NatWest”) exclusively for internal consideration by the recipient (the “Recipient” or “you”) for information purposes only. This document is incomplete without reference to, and should be viewed solely in conjunction with, any oral briefing provided by NatWest. NatWest and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interests may include dealing in, trading, holding or acting as market-maker in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. NatWest is not and shall not be obliged to update or correct any information contained in this document. This document is provided for discussion purposes only and its content should not be treated as advice of any kind. This document does not constitute an offer or invitation to enter into any engagement or transaction or an offer or invitation for the sale, purchase, exchange or transfer of any securities or a recommendation to enter into any transaction, and is not intended to form the basis of any investment decision. This material does not take into account the particular investment objectives, financial conditions, or needs of individual clients. NatWest will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest for investment advice or recommendations of any sort. Neither this document nor our analyses are, nor purport to be, appraisals or valuations of the assets, securities or business(es) of the Recipient or any transaction counterparty. NatWest makes no representation, warranty, undertaking or assurance of any kind (express or implied) with respect to the adequacy, accuracy, completeness or reasonableness of this document, and disclaims all liability for any use you, your affiliates, connected companies, employees, or your advisers make of it. Any views expressed in this document (including statements or forecasts) constitute the judgment of NatWest as of the date given and are subject to change without notice. NatWest does not undertake to update this document or determine the accuracy or reasonableness of information or assumptions contained herein. NatWest accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However, this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed. The information in this document is confidential and proprietary to NatWest and is intended for use only by you and should not be reproduced, distributed or disclosed (in whole or in part) to any other person without our prior written consent.
National Westminster Bank Plc. Registered in England & Wales No. 929027. Registered Office: 250 Bishopsgate, London EC2M 4AA. National Westminster Bank Plc is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.