CAPITAL WATCH: Investor pricing survey March 2016

Investors’ cooling appetite for riskier assets is reflected in the latest Colliers International and Real Estate Capital Investor Pricing Survey.

The responses signal that secondary assets are losing their attractiveness after a three-year run when they have been highly sought after. The survey reports yields on secondary property jumping from 6.8 percent to 7.2 percent, widening the gap with relatively stable prime yields to 199 basis points. This is the highest yield gap since November 2013.

There are also more sellers and expectations for rental and capital growth have fallen.

The survey, carried out three times a year by Dr Karen Sieracki of KASPAR Associates and in its 22nd year, provides detailed analysis of industry expectations for UK property returns.

Investment: sellers increasing

For the first time in several years investors were more muted about buying, while the number that said they were selling went up slightly.

The top picks for acquisitions were industrials, favoured by 40 percent of the respondents, and residential by 33 percent of the respondents. The highest preference was for South East industrials, favoured by 53 percent of respondents (67 percent in the November 2015 survey).

On the selling side, 40 percent of the respondents were looking to divest Central London offices (33 percent in the November 2015 survey).

Yields: the gap opens up

There continues to be some compression for prime yields which moved in by 16 basis points (minus 7bps in the November 2015 survey, 19bps in the July 2015 survey). The average prime yield edged down slightly to 5.2 percent from 5.3 percent in the November 2015 survey (5.4 percent in the July 2015 survey). But the story was about secondary yields which were more volatile and moved out 43bps, negating the downward movement seen last year (minus 20bps in the November 2015 survey, minus 19bps in the July 2015 survey). The average secondary yield is now 7.2 percent, up from 6.8 percent seen in November’s survey (7.0 percent in the July 2015 survey).

For secondary property, the greatest yield movement out was for shops where yields jumped by 80bps to 7.2 percent. Yields on secondary retail warehouses and industrials both moved out by 70bps.

The notable knock-on effect was that the gap between prime and secondary yields increased for the first time for three years, by 52bps. The last time anything similar happened was March 2013 when the gap increased by 72bps (16bps compression in the November 2015 survey; 2bps compression in the July 2015 survey; 26bps compression in the March 2015 survey; 3bps compression in the November 2014 survey). The overall average gap is now 199bps, the highest since November 2013. “Secondary property is losing its attractiveness after a three–year run,” Sieracki said.

The largest gap between prime and secondary yields is for retail assets with shops at 261bps followed by shopping centres at 226bps.

Rental growth: less for retail

Expectations for average 2016 rental growth fell slightly, by 14bps to 2.6 percent pa from 2.7 percent pa in the November 2015 survey. Industrials and distribution were the only sectors which saw a positive adjustment, both at 20bps. The biggest decline was for shopping centres with investors predicting 60bps less growth, or 1.1 percent compared with the 1.7 percent expected last time.

Offices continued to be the sector where the highest rental growth is expected, of 4.4 percent pa, though this is also a fall (4.8 percent pa in the November 2015 survey, 4.5 percent pa in the July 2015 survey).

Average 2017 rental growth was also adjusted down by 13bps to 2.2 percent pa from 2.3 percent pa in the November 2015 survey. Offices and industrial were the only sectors which saw an upgrade of 80bps and 10bps respectively. Shops, retail warehouses and shopping centres all saw the greatest negative change of minus 50bps. Offices continued to see the best rental growth of 4.1 percent pa followed by industrials at 2.6 percent pa.

The biggest relative change from 2016 to 2017 was minus 80bps for both offices and industrial. “As offices, industrial and distribution are losing their relative attractiveness, it could be opportune for the retail sector but stock selection remains key,” Sieracki says.

Capital growth: expectations fall

Investors slashed expectations of capital growth this year by almost half, from 2.9 percent in November to 1.5 percent now. This was a bigger adjustment down than the previous two surveys (November 2015 survey minus 96bps and July 2015 survey minus 74bps). Once again, shops saw the greatest downward change, of minus 220bps, followed by offices at minus 200bps.

Offices remained the sector with the highest predicted capital growth for 2016, of 3.1 percent pa (5.1 percent in the November 2015 survey) followed by industrials at 2.3 percent (3.4 percent pa in the November 2015 survey). Retail warehouses saw the lowest capital growth, of 0.5 percent pa.

However, average capital growth for 2017 improved slightly by 23bps to 0.8 percent pa from 0.6 percent pa seen last time. The biggest positive adjustment was 90bps for distribution followed by 80bps for industrials. All sectors except business parks at minus 0.5 percent pa were expected to see positive capital growth in 2017. Offices continued to have the highest capital growth of 1.6 percent pa followed by industrials at 1.5 percent pa. Investors continued to move the relative change from 2016 to 2017 for capital growth down but the 71bps downward adjustment was not as great as that seen in the November 2015 survey of minus 237bps.

Total returns

In line with less optimistic views of rental and capital growth, forecasts of the total return outcome for 2016 continued to fall, to 6.8 percent pa from 7.8 percent pa in the last survey (8.8 percent pa in the July 2015 survey, 8.6 percent pa in the March 2015 survey, 5.7 percent pa in the November 2014 survey). Two-thirds of the respondents said the main driver was rental growth and 33 percent felt that there was negative pressure on pricing due to Brexit.

The total return for 2017 was slightly increased to 5.8 percent pa from 5.2 percent pa in November.

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