Investor pricing survey: Investors’ optimism is purely short-term as 2012 expectations fall

Flat capital growth is the name of the game for the next two years. Respondents to the latest Colliers CRE/Real Estate Capital Pricing Survey still expected negative capital growth this year, but were slightly more optimistic than in the previous survey, in November. For 2012, investors predicted a 0.9% rise in capital values, compared to 1.3% last time.

Expected 2011 total property returns are also lower than last time, at 5.4%, compared with 5.8% in November. The 8.2% expected 2012 return is down from 9.2% last time. The survey, in its 17th year, is published three times a year and is carried out by KASPAR Associates’ Dr Karen Sieracki. The 19.4% response rate was above average.

Investment intentions: retail rules

Buying and selling intentions reflect where investors see greater or lesser economic activity in the light of government spending cuts. The impact has already been priced in by the property investment community.

Retail was the most favoured sector, 64% of respondents rating it a ‘buy’. Offices were next, at 43%, and industrial at 36%. Central London was the favourite region, with 50% rating it a ‘buy’. South East retail was a ‘buy’ for 50% and the region’s offices for 29%;  36% rated South West retail a ‘buy’ and 29% West Midlands and Scotland retail a ‘buy’.

Industrial interest was thinly spread, with the South East, South West and Scotland each favoured by 21% of respondents. Sale intentions were focused on the north, 29% of respondents rating offices in Wales and North West a ‘sell’, while retail in Wales, North East, North West, Scotland, and Yorkshire and Humberside were each rated a ‘sell’ by 29% of respondents.

Yields: prime property edges up 20bps

Some prime yields have edged up, the biggest rise since the last survey being 50bps for prime retail warehouse yields. Prime office yields have not moved. As a result, prime yields rose an average 20bps since the last survey, from 6.2% to 6.4%. But secondary yields fell 10bps on average.

Prime shops had the lowest yield, at 5.3%, followed by offices, at 6.0%. Prime business parks had the highest yield, at 7.6%, 30bps up since November. The average 6.4% prime yield is actually the long-term IPD average.


Secondary yield movements were patchy, with falls for offices, shops, retail warehouses and shopping centres, but rises for business parks, industrial and distribution. The biggest fall was 50bps for secondary shops, followed by 40bps for offices and shopping centres.

The biggest secondary rise was 60bps for industrial, followed by 50bps for business parks. But at 8.2%, the average secondary yield was unchanged since the last survey. The gap between prime and secondary yields widened again, with a 120-260bps range, compared with 144-235bps last time.  The smallest prime and secondary yields gap was for retail warehouses, at 120bps, while the largest was 260bps for industrial property.

Overall, the average prime/secondary yield gap, at 182bps, narrowed for the first time since March. “This may indicate that investors are moving up the risk curve and selective  secondary pricing is being adjusted,” says report author Dr Karen Sieracki. Respondents felt prime offices and retail warehouses were underpriced, going by rental and capital growth forecasts. Prime shopping centres were seen as fair value and prime business parks, shops, industrial and distribution as overpriced. Secondary offices, retail warehouses, shopping centres and industrial were seen as underpriced.

Rental growth: 2012 outlook still positive

Rental growth prospects for 2011 improved for all sectors except business parks and shops. The average change was 20bps and business parks were the only sector for which rental growth expectations fell, by 30bps (see table). The greatest change was an 80bps rise in expectations for shopping centres. But rental growth is only expected in the  office and retail warehouse sectors this year.



The average all-sector 2011 rental growth expectation was 0.3%, bolstered by a 2.9% annual rental growth expectation for offices – the best figure. The worst rental growth expectation was -1.2% for business parks. For 2012, rental growth expectations were still positive, rising an average 40bps since last time, except for business parks, where rents are expected to fall 10bps (see table).   The highest expected change in 2012 rental growth was 80bps for retail warehouses.

The average all-sector 2012 rental growth forecast was 1.4% and rental growth is predicted in all sectors. Office rental growth was tipped to be highest, at 3.5%. In terms of relative change from 2011 to 2012, retail expectations still show the best improvement, but business park expectations   improved 140bps. “It could be time to take a closer look at this sector as well as retail,” Sieracki says. The smallest rise in expectations was 60bps for offices.


Capital growth: negative then positive

Forecasts for 2011 capital growth remain negative, with the average at -1.5%, but have improved across all sectors except offices, industrial and distribution since last time. Offices capital growth was tipped to stay positive, at 0.2%. Business park, industrial and distribution capital values were expected to perform worst, all at -2.5%.

The average change for 2011 capital growth forecasts since November was 10bps, but this masks some big differences. Shopping centre expectations improved the most, up 170bps, followed by 40bps rises for retail warehouses and business parks. The most negative adjustment in expectations was for industrial, down 100bps, and distribution, down 80bps.

Capital growth forecasts for 2012 were still positive in all sectors, except business parks, where they fell to -0.5%. The average 2012 all-sector capital growth forecast was 40bps lower than last time, at 0.9%. The highest capital growth, of 2.0%, is expected for offices, then retail warehouses, at 1.7%.

On a relative basis, the greatest 2011-2012 change in forecasts was for shops, retail warehouses and distribution, of 280bps. The smallest adjustment was for offices, at 180bps, indicating that respondents think this sector’s momentum will slow down.

Total returns: forecasts cut for 2011 and 2012

The 2011 forecast was cut to 5.4% from 5.8% in November. This is back at a similar level to the forecast a year ago. The 2012 total return forecast fell to 8.2%, from 9.2% last time.

Yields still a property plus

The contributing factors to investors’ slight cut in 2011 total return forecast, to 5.4%,  were varied: 29% of respondents cited falling income; 21% rising yields; and 21%  economic uncertainty. There was greater agreement as to what would contribute to performance. Some 43% of respondents felt it would be founded on mild rental growth.

Asked: ‘Why invest in property now?’,  79% cited attractive yields, which provided a relatively high income return. But there were some concerns: one respondent said it was getting harder to justify property investment and another said supply and deals were constrained to the prime markets.

Half of the respondents said their property investment risk appetite had not changed, while 21% said it had increased. Some expected more opportunities as banks and some inventors offloaded stock.

The rise in 10-year UK government gilts was seen as a risk for property by 71% of respondents. Some felt property was now fairly priced and the rise in gilt prices cut the scope for further yield compression. Others were worried about the risk of yield rises.

However, another 36% felt that the rise in gilts made no difference, as although it made property less attractive in relative terms, its prospective return was still good. Others said gilt yield rises would be reversed, which would support property. Some felt the spread between UK gilts and property was wide enough to insulate property from the rise.