There has been a slight uptick in investor sentiment in the latest Colliers International/ Real Estate Capital Pricing Survey, carried out three times a year by KASPAR Associates’ Dr Karen Sieracki.
Yields have compressed a little in all sectors. Forecasts for 2012 capital growth improved by 1% since the last survey, in July, to -4.7% – the first positive adjustment this year. However, some of that expected loss is likely to continue into 2013.
Looking ahead to 2014, rental growth forecasts are positive in all sectors, for the first time in six years, while capital growth is expected to turn positive too, suggesting the worst will be behind us by then.
Investment intentions: south still favoured
The north-south, sell-buy split is as evident as ever. Some 67% of respondents favoured central London offices and retail, while 58% preferred South East offices and retail, with 50% targeting South East industrial. These levels were slightly lower than in July.
On the sell side, it was very much the rest of the country, with Wales, Yorkshire/Humberside and the North West the main areas for sales, across the sectors. Scotland was the exception, with preferences for buying across all sectors and minimal sales.
Investors are still risk averse, following the location of economic growth and better employment prospects.
Yields: compression for first time this year
Both prime and secondary yields fell, but at different rates. On average, prime yields fell 10bps since July to 6.4%, with industrial yields falling furthest, by 40bps. The only sectors where yields rose were prime business parks and shopping centres, by 30bps and 20bps respectively.
Shops still had the lowest yield, at 5.5%, then offices, at 5.9%, while business parks had the highest, at 7.7%.
Secondary yields fell for the first time this year, by 50bps, led by business parks, down 90bps, although secondary retail warehouse yields rose 40bps. The average secondary yield fell from 9.3% in July to 8.8%, the lowest being 7.7% for shops, then 8.8% for offices, retail warehouses and shopping centres. The highest secondary yield was 9.2% for business parks and industrial.
The gap between prime and secondary yields closed by an average 43bps, as the secondary yield fall was greater than for prime yields. The only sectors where the gap widened were retail warehouses and offices, by 61bps and 8bps respectively. For business parks and shopping centres, prime yields rose while secondary yields fell, cutting the gap by 126bps and 86bps respectively (see graph).
The largest prime-secondary yield gap was 284bps for offices, then retail warehouses, at 262bps; the smallest gap was for business parks, at 143bps, then shops, at 211bps.
“The yield convergence play for business parks is interesting, as many respondents did not want to invest in that sector, making prime much more unattractive,” Sieracki says.
Prime shops, shopping centres and business parks look overpriced in the next few years, mainly because high capital losses are expected. Prime offices and distribution look underpriced, as has been the case since the March survey, and were joined by retail warehouses and industrial.
All secondary sectors except for business parks and shopping centres were seen as underpriced, with higher initial yields offering protection against forecast capital and rental value loss.
Rental growth: negative, but improving
Average rental growth expectations for 2012 improved 50bps, to -1.1%, from July. Rental growth was still expected to be negative in all sectors, except offices, at 0.4%, with shopping centres faring worst, at -2.9%, down 10bps since July. Business park rental growth expectations improved the most, at 120bps, followed by retail warehouses, at 100bps.
Although average rental growth for 2013 was still tipped to be negative, at -0.2%, this was up by an average 10bps since July. The only sectors tipped for rental growth were offices, at 1.4%, and retail warehouses at 0.5%. The worst rental growth prediction was -1.0% for business parks and shopping centres.
Rental growth is expected across all sectors in 2014, with an average 0.9% rise forecast – the first time in six years that all sectors have been tipped for rental growth. The best growth, of 2.2%, is expected for offices, then shops and retail warehouses, at 1.0%. The smallest rental growth is expected to be 0.2% for business parks.
On average, rental growth was forecast to be 90bps better in 2013 than in 2012. The biggest improvement was the 190bps change for shopping centres, followed by 100bps for offices. Business parks were expected to improve the least, by 40bps.
Meanwhile, rental growth was forecast to be 104bps better in 2014 than 2013, with the biggest improvement being 160bps for shops and shopping centres, and the smallest 50bps for retail warehouses.
Capital growth: dip in forecasts for 2013
The average capital growth forecast for 2012 improved 100bps, to -4.7%, since July – the first positive adjustment this year, and across all sectors. The biggest improvement was 220bps for shops, then 130bps for distribution.
Shopping centres were still tipped for the worst capital growth, at -7.2%, but this was down from -8.7% in July, followed by the -7.1% forecast for business parks, unchanged since July. Offices were still tipped to fare best, at -2.4%, then distribution, at -2.6%, up from -3.3% and -3.9% respectively last time.
Forecasts for 2013 capital growth continued to worsen, by an average 110bps since July. Average capital growth was tipped to be -1.1%, compared to a zero growth expectation in July. All types of property were expected to lose value in 2013, except for offices, where 0.1% capital growth was forecast. The worst growth forecast was -2.4% for business parks, then -1.8% for shopping centres.
But by 2014, capital growth is forecast for all sectors and is expected to average 1.5%. This is the first positive capital growth forecast in four years. The best forecast is 2.2% for retail warehouses, then 1.9% for offices. Business parks had the lowest growth forecast, of 0.1%, followed by 0.9% for distribution. No sector is expected to recoup the capital value losses of 2012-13.
On average, capital growth is tipped to be 370bps better in 2013 than 2012, and 240bps better in 2014 compared with 2013.
Total returns: positive up to 2014
The total return forecast for 2012 improved to 1.7%, from 1.0% in July. Some 42% of respondents felt income return would contribute most to property performance, while 25% cited higher secondary yields.
The 2013 total return forecast fell 20bps from July, to 5.9%, compared with a 7.1% forecast in March and 7.9% a year ago. Some 42% of respondents said an improved economy and higher property demand would boost total returns, but this depended on an improvement in business and investor confidence in the second half of 2013.
The 2014 total return forecast was 8.1%, as capital growth was forecast for all sectors. Some 42% of respondents put this down to gradual economic recovery, plus income return, but some also expected small improvements in rents and yields.
Taking secondary stock
Investors felt there is not enough appetite for secondary stock and that secondary prices needed to fall more. Some 58% of respondents felt stock on the market in the second half of this year had not increased, with 25% considering it had.
Respondents were relieved the banks did not flood the market with property disposals and saw some opportunities outside London and the South East.