Spring 2018 Barometer – Fair
There has been no noticeable abatement in investment activity throughout the first five months of 2018 with investors’ appetite to acquire commercial property remaining buoyant, particularly for industrial and city centre offices.
Because this appetite to invest does not appear to be impacted (yet) by global, political and economic events, and we forecast that this trend will continue, the outlook for the UK commercial property investment market over the next three to six months remains Fair.
However, the CBRE All Property Index revealed that April 2018 was the lowest monthly capital value growth since October 2016. Additionally, while capital values increased by just 0.1% in April, rental values were flat over the month.
The question remains how much further can the market go in terms of pricing and rental growth? Many agents now consider current pricing reflects top of the market performance and while the performance in the office and retail sectors (the latter to a lesser extent) has shown recent signs of slowing, there is no evidence of a major shift in outlook for the industrial market.
The generally strong performance of the commercial property market continues to attract a high level of investors who favour it to the main alternative investment classes (gilts and equities) because of its defensive nature and “safe haven” appeal.
While institutional and Local Authority activity remains strong, there is also a vast amount of private equity being made available for direct commercial property investment, a large proportion of which is now coming from North America.
This situation makes it increasingly hard for investors to find good value opportunities and they are going to rely increasingly on their advisers to identify investments which meet their investment criteria and where they are not just over-paying to acquire income.
The maxim – “stick to your principles” is even more important in this market. If you rejected a secondary industrial investment in the North East of England at a yield of 12% – 13% four years ago, then do not buy it now at 6.5%.
There will be another market readjustment. We just don’t know when. Unlike in 2009, lenders are now better protected, with much lower loan to value ratios, so it is largely investors themselves who will bear the brunt of any losses, particularly those who have favoured income over value.
The total return for All Property during the month stands at 0.6% and total return year on year is 11.1%.
As has been the theme for several quarters, it is the industrial sector which has boosted overall results with capital value growth in April of 0.7% and rental value growth of 0.2% producing a total return of 1.1% for the month. This compares with offices which saw capital value growth of 0.2% and no rental value growth while retail, once again the under performing sector, with a fall in capital values of 0.3% and a reduction in rental values of 0.1% (particularly dragged down by shopping centre rents which fell by 0.4%) combining to produce a total return of only 0.2% for the sector in April.
As previously reported, the strong performance of the industrial sector is closely aligned to the growth and success of online retail sales (which also accounts in part for the decline in fortunes of the high street retail and shopping centre sector) which has resulted in strong occupier demand for space across a wide range of unit sizes (from “last mile” delivery depots to regional and national distribution centres).
While there is now reasonable development activity creating new product, the general lack of development finance (on commercially viable terms) and the increase in building cost for industrial units, still limits the amount of space being constructed which in turn adds further pressure on the existing stock.
The Blue Marble Barometer is a quarterly forecast of the UK commercial property investment market based on current data and the direct market experience of Blue Marble Asset Management in acquiring, disposing of, and managing commercial and mixed use properties across the UK on behalf of its clients.
The next Barometer will be published in Summer 2018.
Based in Birmingham, Blue Marble Asset Management is a real estate asset management specialist which presently has more than £100 million of property assets under management. It works for a select range of clients including investment businesses, high net worth individuals, trusts and family offices. Its business is based on taking a holistic view of each of its property investments.