Investors’ bearishness increased in the latest Colliers International/Real Estate Capital Pricing Survey, carried out three times a year by KASPAR Associates’ Dr Karen Sieracki. Prime and secondary yields rose in all sectors except for prime business parks.
Predictions of 2012 rent and capital falls intensified, with the latter expected to drop 5.7%, 280bps lower than in the March survey. But rents and values are expected to improve in 2013, except for business parks and shops.
Risk-averse investors are focusing on the more robust central London and south-east, south-east industrial being overwhelmingly the most popular sector in the July survey.
Investment intentions: looking for growth
Investors are targeting the locations with better economic and employment prospects: Central London and the south-east. But buyers were very selective as to sectors in these locations. South-east industrial was most favoured, cited by 86% of respondents, then central London offices and south-east retail, both preferred by 79%.
Other locations were mainly a sell for 21- 43% of respondents, across all sectors. The north-south divide was wider, with the south a buy and the north a sell. East Midlands, north-east and Yorkshire/Humberside offices were cited as a sell by 43% of respondents.
Yields: mostly on the way up
Prime yields rose an average 29bps and were up in all sectors except business parks, down 10bps. But at 7.4% it remained the highest-yielding sector, with industrial next, at 7.1%. Prime shops had the lowest yields, at 5.6%, then shopping centres and offices, at 6.2%. The average all-sector prime yield was 6.5%, up 20bps from the March survey.
The gap between prime and secondary yields widened again, by an average 30bps, to 275bps. Secondary yields rose an average 56ps to 9.3% since the March survey, bearing the brunt of negative sentiment. Again, there was a wider range of movement than for prime yields, from a rise of 20bps for retail warehouses to 75bps for distribution.
The biggest shift was in secondary distribution yields, which fell in the last survey but rose 100bps to 9.9% in July.
Secondary business park yields rose least, up 23bps to 10.1%, but it is still the highest-yielding sector, followed by secondary distribution, at 9.9%. The lowest secondary yield was 8.4% for retail warehouses, followed by shops at 8.5%. The widest prime and secondary yield gap was 317bps for shopping centres, followed by 305bps for distribution; the smallest was 201bps for retail warehouses, followed by 269bps for business parks.
Overall, prime was seen as overpriced in all sectors except offices and distribution, as in the March survey. Secondary was underpriced except for shops and shopping centres.
Rental growth: still heading south Respondents have sliced a further 60bps off 2012 rental growth expectations since March and expect rents to fall in all sectors. The biggest change was for offices, where 2012 forecasts fell 110bps into negative territory, with a 0.5% fall in rents anticipated. Rents were expected to fall an average 1.6% in 2012; shopping centres were forecast to perform worst, with 2.8% rent falls, and business parks next-worst, at -2.6%. Offices were expected to do best, with a modest fall in rents, followed by distribution, at -0.9%.
Rental growth forecasts for 2013 have also deteriorated since March, except for shopping centres, unchanged at -0.2%. The average all- sector fall was 90bps, taking predicted average rental growth to -0.3%. Business parks, shops and shopping centres remained in negative territory, but industrial, retail warehouses, distribution and offices remained positive.
The best 2013 rental growth forecast was 1.0% for offices, then retail warehouses and distribution, both at 0.2%. The worst rental performance was expected from shops, at -1.9%, and business parks, at-1.2%.
Rental growth predictions for 2013, while more pessimistic this time, were still 130bps better than for 2012. Year on year, shopping centres were tipped to improve most, by 260bps, then business parks, by 140bps. But better 2013 rental growth would not recoup 2012 rent falls in any sector except offices. Worries about the high street persisted, with a 1.9% fall in shop rents predicted for 2013.
Capital growth: a more pessimistic outlook
Investors cut their 2012 capital growth forecasts by another 280bps on average, compared to the March survey. The biggest fall was 390bps for business parks and shops, then 370bps for shopping centres. Retail warehouse predictions fell the least, by 140bps.
Forecasts for 5.7% average capital value falls were more pessimistic than the 3.0% fall predicted in March. Shopping centres were expected to be hardest hit in 2012, with values down 8.7%, followed by business parks, at 7.1%, and shops, at 7.0%. The smallest predicted fall in capital values was 3.3% for offices, followed by distribution, at 3.9%.
Expectations for 2013 were down for all sectors except distribution and business parks, which improved 30bps and 10bps respectively. The average change since March was -30bps.
The 0.0% average all-sector capital growth forecast for 2013 suggests yields will stabilise after rising in 2012. Retail warehouses are tipped for the best capital growth, at 1.0%, then offices, at 0.3%, and shops for the worst, at -0.7%, followed by business parks, at
-0.6%. No sector would recoup forecast 2012 capital losses in 2013.
Capital growth forecasts for 2013 improved an average 570bps on those for 2012. The biggest year-on-year improvement, of 880bps, was forecast for shopping centres, then business parks, at 650bps, so there could be some mileage in investing in these sectors.
Total returns: expectations tumble again
Investors again slashed 2012 total return expectations, by 260bps to 1.0%, from 3.6% in March. It has been a steep fall from the 9.2% predicted in November 2010.
Respondents blamed softening yields (57%) and the debt crisis in Europe (43%), combined with the global slowdown.
Total return forecasts for 2013 also fell, by 100bps to 6.1%, since March. Around half of respondents expected yields to gradually stabilise and a recovering occupier market to produce improved returns than in 2012. Better capital growth was cited by 36%.
Income remained the main reason to invest in property, said 43% of respondents. A similar proportion cited better yields than for other asset classes, especially government bonds, while 36% mentioned lower volatility.
Eurozone troubles hit UK
Eurozone uncertainty is hitting UK property, according to most respondents, with 43% saying it contributed to a lack of confidence in the economy and business, and 36% that it delayed decision making.
Respondents also said it made certain properties untradeable and was the main cause of rising yields and falling values. Better EU leadership was needed, investors said. While 21% felt the UK derived benefit from being seen as a safe haven, this was limited to London and exacerbated the rest of the UK’s poor performance. Investors also said Southern Europeans were entering the UK market for lot sizes of up to £50m and did not care about yield levels.
The 43% of respondents that answered a question on how much new lending to UK property would come from outside banks in a year’s time suggested a 10% to 40% range. Nearly two-thirds thought insurers would provide most of the new debt, while 36% expected debt and opportunity funds to lend. The cost of debt was cited as a problem.
The need for improved transparency, the correct debt/equity structure plus clear exit routes were also highlighted and regulatory uncertainty cited as a concern. On the more positive side, infrastructure was seen as a diversifier, providing stable income flows.