Investors are taking a bleak view of the coming year, according to the results of the latest Colliers International and Real Estate Capital Investor Pricing Survey.
While total return expectations for 2017 increased since the last survey was conducted in March this year, expectations for 2018 fell further amid weak economic growth and concerns over Brexit.
The survey, conducted by Dr Karen Sieracki of KASPAR Associates is now in its 24th year. It analyses pricing of the different property sectors for both prime and secondary product.
Investment: industrial in vogue
Real estate investors selectively bought and sold property across regions and sectors. Industrials remained the favourite purchase for 40 percent of respondents, down from 55 percent in the March 2017 survey. The West Midlands and the North West were the top industrial areas, with 60 percent picking them – knocking out the South-East, which posted 88 percent in the March survey.
Central London retail was seen as a selling opportunity, alongside the North East and Scotland – which were all picked by 50 percent of respondents. On the buy side, the South East topped the table with 40 percent of respondents. Views on buying and selling offices were muted, with 40 percent looking to divest assets in the South East.
Average prime yields were unmoved at 5.4 percent and average secondary yields were also static at 7.2 percent, they have both been fairly stable over the past two years.
Prime retail yields remained the lowest at 4.3 percent and continued to be the only sector with a yield below 5 percent. Prime business park yields remained the highest at 6.4 percent. The greatest compression was minus 30 basis points for prime retail warehouse yields, which are now 5.5 percent. The only outward movement was for retail shop unit yields – up 30bps to 4.7 percent.
The highest secondary yield continued to be business parks at 8.1 percent, which saw the highest compression of minus 20bps along with retail warehouses. Business parks was the only secondary sector which had a yield in excess of 8 percent. The lowest secondary yield was 6.8 percent for retail shop units, retail warehouses and industrial. The greatest outward movement was 10bps for both offices and shopping centres.
The overall gap between prime and secondary yields increased by 2bps to 183bps, from 181bps on the March 2017 survey. The difference was 178bps in the November 2017 survey and 199bps in March 2016.
The gap for offices widened the most, with secondary yield outward movement of 27bps, followed by shopping centres at 16bps. The gap narrowed for only two sectors: business parks by minus 24bps and retail shop units by minus 19bps.
Shopping centres continued to see the greatest prime secondary yield gap of 267bps, followed by retail shop units at 217bps. The smallest gap continued to be retail warehouses at 133bps. All sectors, both prime and secondary, were underpriced except prime offices in 2017, which were fair value. Despite forecast rental and capital loss, yields were high enough to be defensive in the light of diminishing returns.
Rental Growth: all sectors up
Average 2017 rental growth improved by 70bps to 0.6 percent per year, from minus 0.1 percent seen in the March survey. All sectors benefitted from the upgrade. Shopping centres experienced the most growth at 120bps, from minus 1.1 percent to 0.1 percent. Offices followed on 100bps, up from minus 1.7 percent to minus 0.7 percent.
The highest rental growth for 2017 continued to be industrials at 2.6 percent pa, followed by distribution at 2 percent. These were the only two sectors forecast to have rental growth at 2 percent or above. The lowest rental growth was for business parks at minus 0.8 percent, followed by offices at minus 0.7 percent. These were the only two sectors forecast to have negative rental growth in 2017.
Average 2018 rental growth was revised downwards by minus 30bps to 0.16 percent per year, from 0.4 percent in the March survey. All sectors were downgraded – the worst was minus 70bps for business parks, then minus 50bps for shopping centres.
The highest rental growth for 2018 continued to be industrial at 1.8 percent pa, followed by distribution at 1.3 percent and retail shop units at 0.2 percent. All other sectors were negative, with offices and shopping centres the worst at minus 0.7 percent.
The relative change from 2017 to 2018 saw average rental growth revised down by minus 41bps. Industrials and shopping centres had the worst adjustment of minus 80bps. Rental growth for industrial, distribution, retail shop units, retail warehouses and shopping centres is forecast to worsen in 2018, offices face no movement, while business parks should improve.
Capital Growth: dark clouds
Average capital growth for 2017 improved by 146bps to minus 0.1 percent per year from minus 1.5 percent in March. All sectors improved, with shopping centres posting the largest positive adjustment at 280bps. The smallest positive adjustment was 50bps both for offices and distribution.
Industrial and distribution were forecast the highest capital growth in 2017, of 3.2 percent and 2.4 percent respectively. All other sectors have negative outlooks, with offices the worst at minus 2.3 percent. Forecast 2018 average capital growth worsened by minus 73bps to minus 0.8 percent pa, from minus 0.1 percent in March. All sectors had negative movement except for business parks, which improved by 20bps. Offices declined by 210bps.
Only industrials and distribution were forecast to see positive capital growth in 2018 – of 1.2 percent and 0.8 percent respectively. Offices were expected to see the worst at minus 2.7 percent per year.
The relative change from 2017 to 2018 for capital growth was minus 76bps. All sectors were forecast a downturn in 2018 except for business parks, which improved by 60bps from its 2017 level. The worst change from 2017 was for industrial and distribution at 200bps and 160bps respectively.
Total Returns: rental worries
Forecasts for the total return for 2017 improved by 200bps to 4.1 percent pa, from 2.1 percent in the March survey and 2.3 percent in November 2016. Declining rental growth was cited by 30 percent of the respondents as the main area of concern. Other worries were: slowing UK economic growth and static UK interest rates.
However, the forecast total return for 2018 fell by 150bps to 2.4 percent pa, from 3.9 percent in March and 4.7 percent in November 2016. Declining rental and capital growth were each cited by 30 percent of respondents as the main factors in reduced total return in 2018. Other issues were: weak economic growth and concerns over Brexit.
Considering reasons to invest in property, 50 percent of the respondents cited income and 30 percent said its low volatility.