5 minute read time
A closer look at the latest data from the commercial property market.
Commercial property returns
- MSCI reports that capital values rose by an average of 0.5% in December. A seemingly unlikely end to a year that saw average values fall by 6.3%. However, the monthly rise was entirely driven by strong growth in industrial values, and masks ongoing declines in retail.
- Capital growth of 2.1% in the industrial sector in December was the strongest monthly growth rate since the mid-1990s, in a sector that until recently was considered as a low growth, low volatility part of the market. This has been supported by varying degrees of rental growth, but is becoming increasingly yield-driven.
- Values continue to fall across most retail formats. Notably however, the average value of retail warehouses in the South East jumped 1.3% in December, an abrupt turnaround from the 15% decline recorded in the preceding 11 months. At the other end of the scale, central London retail values took a big hit, dropping by 2.8% in December alone.
- The office sector appears to be in something of a holding pattern as investors wait to see how many workers return to their desks in the coming months. Supported by overseas investment, central London values appear to have stabilised, although values in many other regions continue to drift slowly downwards as yields soften.
Capital growth to end December 2020 (%)
Investment market activity
- £7bn transacted in December, in an apparently strong finish to the year, given the circumstances. The full-year total of £44.7bn was the weakest since 2012, but nonetheless represents a solid demonstration of liquidity given the context of the pandemic, Brexit negotiations and dramatic upheaval in the retail sector.
- Despite last-minute Brexit uncertainty, overseas investors ploughed another £1.8bn into the London office market in December. Notable deals in the City and West End were completed by investors from Singapore, Hong Kong, Germany and Italy, while domestic REITS [real estate investment trusts] and institutions were the most prominent sellers.
- A number of mid-sized deals were completed in the retail warehouse sector, reflecting an emerging view that this format may prove more resilient than shopping centres or the high street. Institutions were active sellers as they seek ways of reducing their retail exposure.
- A number of small shopping centre deals did complete in December, all at double-digit yields. Centres in Stirling and Tonbridge were offloaded by funds, while receivers for the Victoria Centre in Southend sold to the go-to buyer of recent times, the local authority.
- The distribution sector continues to attract a wave of global capital, with portfolios in particularly strong demand. Blackstone took its 2020 investment in the sector to £1.9bn, with the acquisition of eight assets from EPIC UK for £335m. Starwood Capital Group sold 10 assets to AIMCo of Canada for £265m, just one year after buying them for £200m.
Capital growth forecasts (%)
Sources: PMA Recession Scenario, CBRE, IPF Consensus
- Knight Frank has not observed any clear movement in benchmark market yields over the last month, but over the last year shifts have been dramatic. Yields for high-street retail, and even the very best shopping centres have moved out by more than 100 basis points (bp) in 12 months, while distribution yields have hardened yet further.
- Just two years ago, the benchmark yield for a prime high-street shop in somewhere like Bath, Brighton or Cambridge was broadly the same as might be attributed to a modern distribution unit with a 15-year income. Today, a potential investor would expect the shop yield to be 250bp higher than that same logistics asset.
- Knight Frank perceives persistently negative sentiment for all retail segments, with the exception of supermarkets, Bond Street and, more recently, those parts of the retail warehouse sector that offer secure income and are not exposed to the fashion sector.
- Knight Frank estimates that yields across much of the office sector are around 25bp softer than their pre-Covid levels. They perceive that sentiment has stabilised for London offices, and assets with long-term income, but remains negative for other regional assets, with a further softening of yields perceived for shorter income in the South East.
- A somewhat surprising feature of 2020 was how successful auction houses were at selling property at a time when all their auctions had to be run entirely online. Allsop raised £434m from 599 sales across the year as a whole, remarkably just £2m less than was raised in 2019.
- Retail continued to account for the highest proportion of assets (59%), despite all the challenges in the sector. However, it was notable that traditional high-street assets were typically sold at double-digit yields, while those for convenience and suburban retail were typically closer to 5%, albeit often with the benefit of long-term income.
- The autumn IPF UK Consensus Forecast, collected from October and published in November, predicted a 2020 all property capital growth number of -9.3%. The actual outcome, as reported by MSCI, was -6.3%. This reflects a year that turned out not to be quite as bad as expected. The May Consensus Forecast for capital growth in 2020 was -12.4%.
- As ever though, the underlying sector-level numbers show a much more nuanced picture. The shopping centre sector did even worse than predicted back in May, declining by 26.6% against a forecast of -24.7%. Yet at the other end of the spectrum, industrial values actually rose by 3.6% in 2020, in contrast to a May forecast -7.1% for the year.
- The IPF Consensus forecasts a further 10% off shopping centre values this year, with retail units and retail warehouses expected to fall by 8% and 6% respectively. The consensus forecast for offices this year is for a 3% decline, while industrial is expected to eke out growth of 1.3%.
- A broader recovery is expected from 2022, with the office and industrial sectors predicted to deliver capital growth of around 4% on the back of 2% rental growth. The retail warehouse sector is also predicted to return to very limited capital growth in 2020 despite ongoing rental value decline.
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.