Responses to the latest Colliers International and Real Estate Capital Investor Pricing Survey show opinion split exactly 50:50 on whether the UK property market has peaked.
The 50% who said it had may point to the lowest yields since just before the 2007 crash, while the average gap between prime and secondary yields has narrowed to 148bps, the lowest since November 2008, suggesting all property is being fully valued.
In fact respondents saw all prime sectors as being overpriced this year and also cut their total return expectations for the first time since the November 2014 survey: from 14.1% at the last survey, in July, to 13%, for 2015; and from 8.8% to 7.8% for 2016.
The survey, carried out three times a year by KASPAR Associates’ Dr Karen Sieracki, provides detailed analysis of industry expectations for capital and rental growth.
INVESTMENT: INDUSTRIAL ON THE UP
Property continued to be a buy, but with more discrimination as to sector and region. Overall, industrial property was the favourite across the regions, with 75% of respondents favouring East Midlands, followed by West Midlands and the South East, both at 67%.
Offices followed, with South East assets most preferred, at 75%, followed by the West Midlands and North West, each at 58%. For retail, 58% of respondents favoured the South West, with 50% each the South East, East Midlands, West Midlands and North West.
The highest “sell” preference was 42% for Scottish industrial. A third of respondents saw North East and North West industrial, Central London offices and retail as a “sell”. There were more selling preferences than in July.
YIELDS: THE GAP CLOSES FURTHER
Prime yield compression was a minimal 7bps compared with a 19bps fall in July, and the average prime yield fell from 5.4% in July to 5.3%. Secondary yields fell 20bps on average and the average secondary yield was 6.8%, down from 7.0% in July. Prime shops yields remained the lowest, at 4.9%, and prime business park yields the highest, at 6.2%. There was no change for prime office and distribution yields. The greatest fall was 30bps for prime retail and retail warehouses.
Business parks still had the highest secondary yield, at 8.1% — the first time a secondary yield had gone above 8% since November 2014. All other secondary yields were sub-7.0%, with shops the lowest, at 6.4%.
The average gap between prime and secondary yields closed 16bps to 148bps — the lowest since November 2008, just after the global financial crisis, showing secondary properties’ continued appeal.
Respondents saw all prime sectors as overpriced in 2015. Retail warehouses and shopping centres were expected to remain overpriced in 2016 but become underpriced in 2017 as total returns were anticipated to fall. Secondary shops, retail warehouses, shopping centres and distribution were seen as overpriced in 2015, becoming underpriced in 2016 and 2017, except retail warehouses.
RENTAL GROWTH: OFFICES STILL LEAD
Expectations for average 2015 rental growth improved 54bps to 3.2%, from 2.6% in July’s survey. Expectations have improved for most sectors since July, apart from shopping centres (no change) and retail warehouses (down 20bps). Industrial rental growth expectations improved the most, by 120bps.
Offices were still tipped for the highest rental growth in 2015, at 7.4%, up from 6.6% in July, followed by 3.9% for industrial, up from 2.7% in July. Shopping centres still had the lowest rental growth expectation, at 0.7% followed by retail warehouses, at 0.9%. Average 2016 rental growth expectations
rose 21bps to 2.7%. The biggest change since July was an 80bps rise in expectations for industrial, to 3.2%, then offices, up 30bps to 4.8% — the highest rental growth expectation. Retail warehouses and shopping centres were tipped for the lowest growth, at 1.7%.
The average 2017 rental growth expectation was 2.3%. Offices were tipped for the best growth, at 3.3%, and shopping centres the lowest growth, at 1.8%. The largest downgrade in expected rental growth from 2016 to 2017 was 150bps for offices.
CAPITAL GROWTH: LOWER IN 2017?
Expectations for average 2015 capital growth improved 137bps to 8.2% from July’s survey. Distribution expectations improved the most,
at 330bps, while the biggest negative change was 120bps for retail warehouses. Offices were still tipped for the highest capital growth, at 13.4%, up from 11.0% in July, and retail warehouses for the lowest growth, of 4.0%.
The average 2016 capital growth expectation was downgraded 96bps, but expectations have improved since July for industrial (by 70bps), distribution (up 50bps) and shops (up 20bps). The largest downgrade was 80bps for shopping centres. Offices were tipped for the highest 2016 capital growth, at 5.1%. The lowest capital growth expectations for 2016 continued to be for business parks, at 1.3%, compared to 1.7% in the July survey.
But respondents believe capital growth will slow significantly in 2017, with the average forecast 0.6%, although some growth is still expected in all sectors, except business parks.
Offices were tipped for the highest capital growth: 1.7%. Average expectations for 2016 were 517bps lower than for 2015, compared to a 400bps fall in July. The greatest fall was 830bps for offices and the least negative a 180ps predicted fall for retail warehouses.
TOTAL RETURNS: PREDICTIONS CUT
Total return expectations for 2015 fell for the first time since the November 2014 survey, to 13.0%, from 14.1% in July, with 83% of respondents citing yield compression as the main cause and 58% lower rental growth.
The 2016 total return expectation also fell for the first time since November 2014, from 8.8% in July to 7.8%, with 75% saying lower rental growth would be the main cause. With regard to yields, 42% predicted compression whereas 33% thought they would rise. For 2017, the total return expectation was 5.2%.
Asked: “why invest in UK property now?” 58% of respondents said it was due to relative good returns and 42% said it was for income.
CONCERN AT CHINA’S CRISIS
More than two thirds of respondents (67%) saw the slowdown in China as a threat to investment in UK property, with a third expecting a modest reduction in capital.
Other concerns were worries about pricing and the impact on central London, but 33% saw an upside, as Chinese capital would be allocated to the UK due to its safe haven status and diversification benefits. Wealth preservation and a transparent UK legal framework were also seen as positives.
On the topic of a possible UK exit from the EU, 50% said it would be slightly negative; 33% were neutral and 17% saw it as very negative. In the slightly negative camp, 33% felt uncertainty about the referendum was likely to have more impact than the referendum itself. Some felt London had the most to lose, as financial services and its capital can move elsewhere rapidly.