CAPITAL DATA – MARCH 2013
Yield stabilisation fails to stem slip in investors’ return expectations
The improving total returns outlook in last November’s survey has not been maintained in the latest Colliers International and Real Estate Capital Investor Pricing Survey.
Investors shaved their 2013 and 2014 total return expectations. But apart from secondary business parks, yields moved little in the past four months and rental growth is still expected across the board next year. The survey reflected industrial property’s growing popularity, especially in the South East.
The survey, carried out three times a year by Dr Karen Sieracki of KASPAR Associates, analyses the views of the property investment community, providing short-term, detailed analysis of capital and rental growth expectations. The 18.1% response rate this time was above average.
Investment intentions: industrial is popular
Central London and South East property was still a selective buy in all commercial sectors, as in the November survey, but there was more interest in industrial this time.
Some 69% of respondents favoured central London and South East offices. For retail, the South East was preferred by 62%, compared with 38% for central London.
South East and West Midlands industrial was a buy for 62% of respondents, followed by central London, East England, East Midlands and the South West, at 46% each.
The rest of the country was seen as very much a ‘sell’, apart from Scottish industrial, which was regarded as a ‘buy’ for 38% of respondents. Wales, Yorkshire/Humberside and the North East were the main areas for sales: 46% of respondents identified Welsh, North East and Yorkshire and Humberside offices and retail as a ‘sell’.
Investment continued to focus on areas with actual and forecast economic growth or better employment prospects. Investors were still relatively risk-averse, concentrating on central London, the South East, plus the other selected locations mentioned above.
Yields: down for prime distribution assets
Prime yields stabilised, with only 10bps compression. The average prime yield across all sectors remained the same as in the last survey, at 6.4%. Prime offices and shopping centre yields also stayed the same, while prime shop yields fell 10bps. Prime retail warehouse and industrial yields rose 10bps. The greatest yield movement was a 40bps fall for prime business parks and distribution (see chart).
The lowest prime yield was still for shops, at 5.4%, then offices, at 5.9%. The highest was for business parks, at 7.3%, down from 7.7%.
Secondary yield movements were again greater than for prime, with more sector variation. The average secondary yield rose 60bps to 9.4%, from 8.8% in November, but was skewed by a 360bps rise for secondary business park yields, to 12.8%, from 9.2% in November. If this is removed, the average secondary yield movement was a 10bps rise.
The lowest secondary yield was 8.1% for shops, but this is up 40bps since November. Secondary office and retail warehouse yields compressed by 40bps.
The gap between prime and secondary yields widened on average by 71bps. The prime/secondary gap closed by 36bps for offices, 53bps for retail warehouses and 17bps for industrial, but the gap widened 84bps for distribution, followed by 61bps for shops.
The largest prime/secondary yield gap was 553bps for business parks, followed by 331bps for distribution; the narrowest gap was 209bps for retail warehouses, followed by 228bps for industrial.
“These sectors are linked to changes in retail, as retail warehouses are cheaper locations for retailers and the industrial sector is experiencing increasing demand for delivery of internet orders,” Sieracki says.
Respondents considered prime retail to be overpriced and secondary retail underpriced. Prime offices were still seen as underpriced, but prime business parks and prime industrial as overpriced, while prime distribution was considered to be fair value.
Overall, secondary property was viewed as underpriced, except for shopping centres, which were considered fair value. The higher initial yield offers some protection against forecast capital and rental value loss.
Rental growth: positive in 2014
Rental growth predictions for 2013 fell by an average 10bps from November, to -0.3%.Negative rental growth was forecast for all sectors except offices, at 1.1%, and 0.0% for distribution. The worst rental ‘growth’ forecast was -1.4% for shopping centres (see table).
But rental growth is still expected in all sectors in 2014, the average rise being 1.0% – 10bps better than in November. Offices are tipped for the highest rental growth, of 1.9%, compared with 2.2% in the last survey, followed by retail warehouses at 1.3%, up from 1.0% last time. The lowest rental growth prediction was 0.4% for the industrial sector.
Rental growth in 2014 was forecast to be 130bps better, on average, than in 2013. The biggest improvement was 210bps for shopping centres, then 180bps for retail warehouses. The smallest relative change between 2013 and 2014 was 90bps for industrial property.
Capital growth: further 2013 slide expected
Capital growth forecasts continued to slide,by 44bps on average since November. Capital growth is now expected to fall an average 1.4% this year, compared with the 1.1% fall predicted in November, with capital values falling in all sectors. Business parks are still expected to have the worst fall in value, of 2.7%, compared with the 2.4% fall predicted in November.
By 2014, capital growth is forecast in all sectors apart from business parks, where values are still expected to fall, by 0.1%. But the average capital growth expectation has fallen from 1.5% in November to 1.2%.
Retail warehouses are still tipped for the best capital growth, at 2.0%, down from 2.2% in November. The next best prediction is 1.9% for offices, unchanged since November. For business parks, shops and shopping centres, forecast 2014 capital growth would not recover the losses expected in 2013.
The relative change from the 2013 to 2014 forecasts was a 250bps average improvement, up from 240bps last time. Shopping centres are still tipped for the best growth, at 290bps, down from 330bps in November, followed by retail warehouses, at 280bps, compared with 300bps in November. The smallest relative change was 210bps for offices.
Total returns: expectations dip again
Total return expectations for 2013 fell again, to 5.4%, from 5.9% in November, 6.1% in July, 7.1% a year ago, and 7.9% in November 2011. The 2014 return forecast was 7.6%, down from 8.1% in November.
London losing its shine
Respondents felt London was losing its appeal as a safe haven for international investors; 62% of respondents said this would happen in the next two years. Some 38% of respondents put this down to sterling’s weakness and 46% to a eurozone recovery. Others felt UK prime yields were too tight.
Asked whether a referendum on the EU would make a difference, 46% of respondents said yes and 38% no. The reasons were varied: it would be a risk factor in investment decisions; prime yields would rise if investors’appetite fell; and uncertainty was not good. Income is still the factor most cited as affecting total returns; 38% of respondents mentioned it. Other factors were: repricing of medium-term risk; low interest rates and bond yields; investment demand; capital values stabilising late this year; a sluggish economy; soft rental values; lack of tenant demand; and too much space.
Some 46% felt financing was easing, 23% said it wasn’t and 31% had no comment. The main reasons cited were: new lenders; banks being relationship driven; lending being just for prime assets; a CMBS recovery this year; and some lenders moving up the risk curve.