Investor pricing survey: Bullish sentiment on capital growth boosts return expectations

Respondents to the latest four-monthly Colliers International and Real Estate Capital Investor Pricing Survey were more optimistic about capital growth and total returns than in the last survey, in March. Total return expectations for 2013 jumped from 5.3% to 6.25% and investors expected capital growth in all sub-sectors apart from shops. Further improvement is expected in 2014.

There were early signs that investors are looking at offices in selected locations outside the South East again, but they remained cautious about retail, expecting more impact from retailer consolidation. Industrial assets continued to be popular.

The survey, in its 20th year, by Dr Karen Sieracki of KASPAR Associates, analyses the property investment community’s views, providing a short-term, detailed analysis of expectations for capital and rental growth.

Investment intentions: interest strengthens

The number of buyers continued to creep up, with 75% favouring central London offices, compared with 69% in March, and 67% South East offices. The interest in offices is starting to ripple out; 50% of respondents reported buying offices in Scotland and 42% in the North West.

The most popular spots for selling offices were the West Midlands and North East (both 50%), then East Midlands (42%) and Wales (33%). There was still healthy interest in buying industrial assets and it was more widely spread, with 75% citing the South East and West Midlands, 50% the East Midlands and Scotland and 42% the North West and South West.

The South East was again retail buyers’ favourite, favoured by 58% of respondents. Yorkshire and Humberside was the area where most respondents (50%) preferred to sell, then the North East (42%) and East Midlands, South West, North West and Scotland (33% each). Retail consolidation is expected to have an impact on these areas.

There is interest in the industrial/distribution sector on the back of online sales, which are forecast to grow 11% per year in the next five years, compared to in-store retail sales of around 0.9% annually for the same period.

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Yields: down for most secondary assets

Prime yields continued to stabilise with an average 20bps fall, compared with 10bps in the last survey. This put the average cross- sectors yield at 6.2% – below IPD’s 6.4% all- property yield in May. Prime distribution yields fell furthest, by 80bps, then shops, retail warehouses and shopping centres, each at 30bps. The biggest rise was 50bps for business parks, then offices, at 10bps.

The average secondary yield fell to 8.8%, the same as in the November 2012 survey, but there were wide variations between sectors. For example, secondary retail warehouse yields fell 100bps to the lowest secondary yield of any sector, at 7.8%, while secondary office and business park yields rose 50bps. Secondary distribution yields compressed 50bps as online retailing maintained interest in this sector.

Secondary retail yields have not been at the same level as their long-term averages since March 2011. Last time, the gap between prime and secondary yields opened by 71bps; this time it narrowed by an average 32bps, although a 307bps narrowing of the gap for business parks skewed the figure. The largest prime-secondary yield gap was 344bps for offices, then industrial, at 287bps. All prime/ secondary yield gaps have been above their long-term average since March 2011.

Prime and secondary offices and industrial assets were seen as underpriced, prime shops and shopping centres as overpriced, and prime retail warehouses and distribution as fair value. Respondents said that if prime yields remained at the same level they would be underpriced in 2014. Overall, secondary was seen as underpriced, as capital and rental growth forecasts became more positive.

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Rental growth: retail warehouses to improve

Rental growth predictions for 2013 improved  10bps from the March survey. Average rental growth was still expected to be negative, at -0.2%, compared with -0.3% in March.

Offices continued to be tipped for rental growth, of 1.3%, as was industrial property, for which expectations improved 60bps to 0.1%. Retail warehouse and shopping centre expectations also improved, by 50bps, but negative growth is still forecast for the latter, at -0.9%. Expectations for distribution were flat, at 0%, while forecasts remained negative for the other sectors.

Rental growth was expected in all sectors except business parks in 2014. Average rental growth was expected to stay at 1.0%. The biggest change since March was for retail warehouses, which were forecast to improve 170bps from the previous survey.

Investors expected retail warehouses to show the highest rental growth for 2014, of 3.0%, then offices, at 1.9%. The lowest rental growth forecast was -0.2% for business parks, followed by shopping centres, at 0.3%.

Rental growth was forecast on average to be 100bps better in 2014 than 2013. The biggest beneficiary was retail warehouses at 300bps, followed by shops and shopping centres, at 120bps each. “This confirms that the retail sector is in transition in terms of performance, with offices and distribution the main beneficiaries in 2013,” Sieracki says.

Capital growth: 2013 forecasts turn positive

Capital growth expectations for 2013 turned from being negative across the board in March to being positive, except for shops, where -0.3% growth was expected in 2013. The average capital growth forecast was 0.4%, up from -1.4% in the last survey and the first time respondents have been so positive since the November 2011 survey.

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The highest capital growth, of 1.6%, was predicted for offices, followed by retail warehouses and industrial property, at 0.6%. The biggest positive adjustment was predicted for business parks, at 280bps, followed by shopping centres, at 210bps.

Investors still expected positive growth in all sectors in 2014, with an average 1.8% rise, up from 1.2% in March. The best capital growth, of 2.6%, was predicted for offices, followed by 2.5% for retail warehouses. The biggest change was for shopping centres, expected to improve another 110bps compared to March, then industrial at 80bps.

The average improvement between 2013 and 2014 capital forecasts was 130bps, compared with March’s 250bps. The best improvement was again for shopping centres, of 190bps, along with retail warehouses. Sieracki says business parks are one of the most unloved sectors “but the time is coming when values will have fallen enough to create opportunities for alternative use.”

Sinking feeling on bonds

Bonds were felt to be pricey and not based on fundamentals, so respondents thought there would definitely be a price adjustment. But only 17% expected values to crash, 50%  did not expect a crash, while another 17% said there might be a crash further down the line.

Some 42% of respondents felt bond yields would rise in the medium to long term and that prices would drift. Another 33% expected central banks to balk at withdrawing quantitative easing too quickly. Others felt  interest rate rises would be bumpier than expected and markets tended to over-react.

Some 67% felt the Euro crisis was not over: 33% cited the fact that the European economy was still shrinking; another 33% mentioned the potential for policy missteps. Other reasons cited were: the upcoming German elections; high unemployment; indebtedness; and susceptibility to economic shocks.

Some 42% saw it as a good time to invest in UK property, because of its good income yield. Another 33% felt rental growth would increase as the economy grows, while 33% saw property as a good risk mitigation play.