Fund Finance Insights

Retail and industrial outperform, while office sector values struggle

5 minute read time

Tom Sharman, Head of Strategy and Insight, Real Estate Finance, comments on the latest developments in the commercial property market.

Debate rages as to whether the economic recovery is V-shaped, U-shaped or even a square root. Frankly, most landlords of retail assets would be delighted with evidence of any kind of recovery, no matter what shape. Yet, seemingly out of nowhere, the retail warehouse sector appears to have turned a corner, with a range of key metrics pointing firmly in the right direction. Firstly, and most importantly, active investors have returned, bringing a sea change in liquidity. British Land, Brookfield and Columbia Threadneedle have been amongst the most notable buyers in recent months, changing the dynamics of a market that had previously been left to those focusing on distress or alternative-use value. There has been a dramatic improvement in sentiment, with agents reporting that benchmark yields have hardened by up to 100 basis points (bp) in recent months as returning investors have competed for the best stock. These improved comparables are starting to feed through to valuations, with MSCI reporting that the average retail warehouse value has jumped by almost 5% since March.

Of course, this upturn in values must be seen in the context of the preceding three years, during which average values across the sector had fallen by a third. So, beyond the return of some respected investors, is there any evidence that this is anything more than the proverbial dead-cat bounce? In fact, a closer look at underlying occupier metrics does indeed allow for some optimism that there is firm ground for a sustained and meaningful recovery, at least relative to other parts of the retail sector. MSCI data shows that the vacancy rate for retail warehouses increased from 5% at the end of 2018 to 6.6% at the mid-point of 2021. Yet, given the incredibly challenging background in retail, this seems like a rather benign outcome – certainly when compared to in-town shopping centres where, over the same period, the vacancy rate has almost doubled to 23.4%. Footfall data also provide significant comfort, with retail parks reported to have returned to pre-pandemic levels in recent months whilst shopping centres and high streets still lag 25% behind their pre-pandemic trend.

With the best will in the world, few shoppers would consider a visit to a retail warehouse as an experience they need to memorialise on Instagram, but they do represent convenience, and this should be seen as the primary factor for any asset in the sector

Commercial property returns 

  • The investment research firm MSCI reports that commercial property values rose by an average of 0.8% in July and are up by 4.3% so far this year. Perhaps the most notable aspect is that retail values are now contributing positively to year-to-date growth, in contrast to offices, which are down by 1.4% on average.
  • Industrial values continue to rise at a remarkable pace – the annual growth rate of 19.5% is the highest since 1989. While supported by healthy annual rental growth of 4.6%, returns are primarily being driven by yield compression. The average equivalent yield for industrial assets in the MSCI index has fallen below 5% for the first time.
  • In a turnaround for the retail sector, average capital values rose over the past six months, the first time this has happened for more than three years. This was driven by the retail warehouse segment, which has seen values rise by an average of 4.7% over that period. In contrast, shopping centre values are down by 6.9% over six months.
  • The office sector has been the underperformer so far in 2021, with values down in most regions. The only exceptions have been the City of London (0.7%) and Office Parks in the South East (3.6%). The growth in the latter segment seems to be almost entirely driven by science parks around Oxford and Cambridge.     

Capital growth to end July 2021 (%)

Source: MSCI UK Monthly Property Index

Investment market activity

  • Q3 got off to an encouraging start, with £4.6bn worth of transactions closing in July – a 75% uplift on the same month last year. The industrial sector continues to dominate, accounting for almost £2bn of the total. Industrial investment in the first seven months of the year has already exceeded the annual total in 18 of the past 20 years.
  • By far the largest deal of the month, and of the year so far, was the sale and leaseback of Asda’s distribution network to Blackstone for £1.7bn. The portfolio comprises 7m square feet across 25 assets, most of which benefit from new 24-year leases and RPI-linked uplifts. The purchase price is thought to represent an initial yield of around 4%.
  • The acquisition of GCP Student Living by Scape and IQ is the eighth student portfolio to transact this year, and by far the largest. The buyers, who paid £969m for the real estate investment trust (REIT), will split the portfolio between them. Investment in the sector has now reached £2.9bn this year, compared to just £600m across the preceding nine months.
  • The retail park sector is showing some signs of recovery, with almost £1.5bn transacted so far this year. In July, British Land bought Thurrock Shopping Park for £82m, while Realty Income acquired Hermiston Gait in Edinburgh for £80m.
  • Activity in the office sector was limited, but overseas investors continue to demonstrate their appetite for prime Central London assets. The highest-profile deal in July was the purchase of 8 St James’s Square by Deka for £220m, representing an initial yield of 3.5%.             

2021 YTD Investment by Sector

Market yields

  • The CBRE investment yield guide for August shows a clear bifurcation in the market. Industrial assets, Central London offices, supermarkets and retail warehouses are attracting strengthening investor demand, whilst sentiment for high street retail, shopping centres and regional offices continues to weaken.
  • CBRE considers that benchmark prime yields for retail parks, both restricted and open A1, have come in by 50 basis points (bp) since June, to 6.25%. It estimates that the benchmark for prime solus bulky units has also come in by 50bp since June, and by 100bp since March, to 5.5%. Even secondary parks have seen yields harden, by 75bp, to 9.25% in recent months.
  • Investor demand for industrial assets has so far not been deterred by record pricing. CBRE considers that prime benchmarks for logistics assets and multi-let estates, both in London and elsewhere, have hardened by a further 25bp in the past month. The benchmark prime logistics yield is now 3.75%, in by 75bp over the past 12 months.
  • Despite relatively thin trading in the office sector, CBRE estimates that the prime West End yield has also hardened, to a new cyclical low of 3.25%, while sentiment for City assets is also said to be improving. In contrast, sentiment for the South East and regional markets remains weak.        


  • Analysis from EIG Property Auctions of the UK commercial auction market shows that lots sold in Q2 were up by 73% year on year, and sales proceeds were 125% higher. The comparable period in 2020 coincided with the first lockdown, when many auctions were halted altogether.
  • Allsop’s, which operated throughout that period via online-only auctions, recorded an 87% year-on-year increase in sales proceeds. This perhaps reflects investors’ increasing familiarity with online bidding, as well as improved sentiment more broadly. Larger lots have been increasingly common, including £15m worth of shopping centre transactions.  

Market forecasts

  • One challenge with interpreting forecasts is knowing how they might apply to different assets. Respected independent forecaster PMA attempts to help in this respect by producing forecasts for both prime assets and the institutional market more broadly (as represented by the MSCI index).
  • Typically, prime assets prove more resilient in a downturn and start to recover first. As the recovery becomes more established prime assets will often start to underperform as investors gain more confidence in occupier market conditions and seek out the higher yields in secondary assets. This latter stage happens most quickly where occupier and investor demand exceed the supply of prime stock.
  • This is best illustrated in the logistics sector, where PMA forecasts that persistent excess of demand over supply will see average values significantly outperform prime over the next few years.
  • In contrast, when structural factors suggest that demand is unlikely to match supply, such as for shopping centres and offices outside of the major centres, prime assets are expected to outperform.

Looking forward

The existential threat from online retail has clearly not gone away and should remain a primary consideration for any investor looking to dip their toes back into the retail sector. The fundamental question is: can a given asset provide a customer with either the convenience or shopping experience to represent an appealing alternative to home delivery? With the best will in the world, few shoppers would consider a visit to a retail warehouse as an experience they need to memorialise on Instagram, but they do represent convenience, and this should be seen as the primary factor for any asset in the sector. Parking ratios, road access and visibility are longstanding criteria for customer convenience and will remain so. Yet, convenience for the retailer is also paramount as retail warehouses become an ever-more integral part of omni-channel delivery. Low site coverage, good rear access to units and limited restrictions on operating hours are all key factors for urban logistics and are likely to become equally paramount for retail parks.

Delivery and returns put pressure on margins, and finding ways to reduce these costs is a key priority for retailers. It is well known that the “last mile” of delivery is the most expensive, and therefore encouraging more customers to cover this last mile themselves would be a significant win. However, the more retailers start to consider retail warehouses as a simple fulfilment channel rather than a genuine driver of sales, the more they will focus on a straightforward comparison of all-in costs between retail warehouses and just plain warehouses. This focus on cost has become increasingly apparent in recent years, with investors discounting values more aggressively on retail parks that charge the highest rents.

According to MSCI, capital and rental values for retail parks with top quartile rents declined at twice the rate as those in the bottom quartile for the past two years. Increasingly, retailers are looking for the most cost-effective route to market, and retail parks that can offer that today should indeed be able to look forward to a sustained and meaningful recovery.

By Tom Sharman

Head of Strategy and Insight, Real Estate Finance