Secondary retail has become the toxic sector for respondents to the latest Colliers/Real Estate Capital Pricing Survey. They reported yield rises for most secondary retail sub-sectors and expect rents and capital growth to fall more than previously expected this year and next. Meanwhile, there has been a positive shift in the relative value of industrial property, particularly distribution.
Yields for secondary distribution compressed by 1.3%, closing the gap with prime distribution – one of the most active investment sectors since the last survey in November, with several big portfolios traded. The survey, carried out three times a year by KASPAR Associates’ Dr Karen Sieracki and in its 18th year, provides detailed, short-term analysis of expectations for property capital and rental growth.
Investment intentions: risk aversion rules
A north-south divide was more pronounced than ever and investors are risk averse. The most favoured purchases were central London offices and south-east industrial, both cited by 67%, followed by central London retail, cited by 58%. This was very slightly less interest than in the November 2011 survey, except for south-east industrial, which was now more preferred.
Residential was quite strongly favoured as a purchase for the first time, with central London preferred by 42% of respondents and south-east residential by 33%. Investors were sellers across a wide geographic area, from the East Midlands and south west to Scotland and across all sectors. North-east retail and north-west offices were the most popular ‘sells’ each, cited by 50% of respondents, followed by Wales and Yorkshire, and Humberside. Investment activity was concentrated on locations where economic growth was forecast and where there would be better employment prospects.
Yields: retail up, distribution down
Respondents reported a small rise in prime yields (see chart) with the largest movement, of 60 basis points, for business parks. The average movement across all sectors was 16bps.
Prime office and distribution yields changed little, with offices benefiting from the strength of the central London market. The average prime yield was 6.3%, up 20bps from 6.1% in both the July and November 2011 surveys. Prime shops have the lowest yield, at 5.2%, and business parks the highest, at 7.5%, returning to the level seen back in July 2011.
Secondary yields were much more volatile, with a range across the sectors from 130bps compression for secondary distribution to a 130bps rise for shops. Secondary shopping centre yields also jumped, by 80bps. But the average movement was a rise of only 4bps, so the average remained at 8.7%.
The gap between average prime and secondary yields actually fell very slightly, by 13bps to 245bps. But again, this disguises the large changes in the gaps between retail and distribution property. The gap between prime and secondary distribution yields reduced by 130bps, while the gap between prime and secondary shop yields increased by 126bps to 269bps, up from 143bps in November. The smallest prime/secondary yield gap was 221bps for retail warehouses. But, says Sieracki: “Secondary property is finding its own level, as there was little investor interest.”
Rental growth: worse for 2012, better for 2013
Rental growth expectations for 2012 were cut by 60bps on average and again, investors were most bearish on retail. They slashed shopping centre rental growth predictions by 160bps, from -1% to -2.6%, and shops by 140bps to -1.6%. The only positive change was distribution’s 70bps rise, to -0.3% (see table).
Average rental growth was expected to be -1.0%. The best rental growth expectation was for offices, at 0.6%, which was the only positive sector, benefiting again from the central London effect.
Investors believe rental growth prospects for 2013 are much better, with rents predicted to rise an average 163bps, putting all sectors, except for shopping centres and business parks, in positive territory. But 2013 rental growth expectations have fallen an average-10bps since November, with the biggest negative change, of -110bps, for shops, followed by -90bps for shopping centres.
Average rental growth of 0.7% was expected in 2013 across all sectors. The best forecast was 2.3% for offices, up 90bps since the last survey, then 1.3% for retail warehouses, up 40bps. The worst rental growth expectation was -0.2% for shopping centres.
Capital growth: shopping centres to fall 5%
Investors slashed their 2012 capital growth forecasts by an average 164bps, compared with the November survey. The largest reduction was 580bps for retail warehouses followed by 260bps for shopping centres. The only positive adjustment since November, of 120bps, was for distribution. Negative capital growth was expected for all sectors this year, with the average at -3%. The biggest expected fall in values was -5% for shopping centres.
Similarly, investors’ view of 2013 worsened, though the average reduction was lower, at 45bps. The greatest fall was 160bps for shops, to a 0.1% capital growth prediction for 2013, followed by shopping centres, down 100bps to 0.4% expected capital growth. Predictions for offices and retail warehouses both improved 30bps since the last survey.
The average capital growth expectation across all sectors for 2013 was 0.3%, with falls in capital values expected for only two sectors: business parks (-0.7%) and distribution (-0.2%). Retail warehouses were tipped for the best capital growth, at 1.4%, followed by offices, at 1.3% – the only sector expected to recoup the forecast capital loss for 2012.
The largest relative change between 2012 and 2013 was 540bps for shopping centres, followed by 500bps for retail warehouses. “Now is the time to pay attention to retail, due to its relative improvement from 2012 to 2013,” Sieracki says.
Total returns: expectations fall again
Investors slashed their 2012 total return expectations again, by 250bps to 3.6%, from 6.1% in November, 8.2% in March 2011 and 9.2% in November 2010. Income will be the main factor driving performance, said 42% of respondents, whereas 33% felt outward yield movements would be the main factor. The cut in return expectations for 2013 was smaller, to a 7.1% total return, down by 80bps from 7.9% in November.