Return to search

UK pricing: New year, new hope

Investors are more upbeat about the near future for the UK market, according to the results of the latest Colliers International and Real Estate Capital Investor Pricing Survey.

The data show 2017 total return, rental and capital growth were much better than expected. Expectations for 2018 total returns remain positive despite some negative projections of rental and capital growth.

The survey, conducted by Dr Karen Sieracki of KASPAR Associates, analyses pricing of the different property sectors for both prime and secondary product.

Investment: Strong Industrials

Real estate investors continued to selectively buy and sell property across regions and sectors. Industrials remained the favourite purchase by 45 percent of the respondents, up from 40 percent in the July 2017 survey. The West Midlands and the North West were the top industrial regions, with 55 percent picking them, albeit down from 60 percent in July. The South East joined them on 55 percent and the East Midlands was also a buy at 45 percent.

Overall, retail was seen as a selling opportunity by 36 percent of the respondents but no one area had dominance. Central London offices were also seen as a sale by 36 percent.

Yields: Continued Stability 

Average prime yields retreated slightly by 20 basis points to 5.2 percent, from 5.4 percent in July, while average secondary yields edged outwards by 10bps to 7.3 percent, from 7.2 percent in July. They have both remained relatively stable over the past two years.

Prime retail shop unit yields remained the lowest at 4.6 percent and continued to be the only sector with a yield below 5 percent. Prime business park yields remained the highest at 6.1 percent.

The greatest compression was minus 40bps for prime distribution yields. The only outward movement was prime shopping centre yields, up 10bps to 5.3 percent. Business park and shopping centre yields, both at 8.3 percent, continued to be the highest among the secondaries. The lowest secondary yield was industrials at 6.7percent. Secondary office yields experienced the greatest compression at minus 20bps.

The overall gap between prime and secondary yields increased by 23bps to 206bps from 183bps in the July survey.

The gap for business parks widened the most, by 55bps, followed by retail warehouses at 51bps. The gap narrowed for only two sectors – offices at minus 24bps and industrials at minus 2bps.

Shopping centres again had the greatest prime secondary yield gap, at 300bps, followed by business parks at 224bps. Industrials had the smallest gap, at 149bps.

All prime sectors were overpriced for 2017 except for industrials and distribution. All prime sectors were underpriced for 2018 and 2019 due to lower expected returns and higher yields.

Secondary offices for 2017 were overpriced, while all secondary sectors were underpriced for 2018 and 2019.

Rental growth: Offices leap

Average rental growth continued to improve – by 60bps to 1.2 percent per year, from 0.6 percent in the July survey. Offices and business parks recorded the biggest change, with both up 120bps, followed by distribution, up 110bps.

The highest rental growth for 2017 continued to be industrials at 3.6 percent, followed by distribution at 3.1 percent.

There were no negative rental forecasts for 2017 and the average forecast for 2018 rental growth improved by 30bps to 0.5 percent, up from 0.2 percent in the July survey. The highest rental growth forecast for 2018 continued to be industrials at 2.6 percent, followed by distribution at 2.3 percent.

The relative change from 2017 to 2018 saw average rental growth revised downwards by minus 74bps. Average rental growth for 2019 was forecast at 0.4 percent per year.

Capital growth: Shops woe

Average capital growth for 2017 improved by 270bps to 2.6 percent per year, from minus 0.1 percent in the July survey. Figures were up for all sectors except shopping centres, at minus 20bps. Industrials had the largest positive adjustment at 480bps. Industrials and distribution continued to be the top sectors for capital growth in 2017. Shopping centres was the only sector that was forecast negative capital growth, of minus 1.0 percent.

The forecast for 2018 average capital growth improved by 30bps to minus 0.5 percent per year, from minus 0.8 percent in July 2017. Only two sectors experienced worse capital growth adjustment – shopping centres at minus 130bps and retail shop units at minus 80bps. The greatest adjustment was for distribution, of plus 180bps.

Only industrials and distribution continued to receive positive capital growth forecasts for 2018, of 2.4 percent and 2.6 percent respectively. Shopping centres had the worst forecast at minus 2.7 percent.

The relative change from 2017 to 2018 for capital growth was minus 310bps, which forecast worse capital growth in 2018 for all sectors from their 2017 levels. Average capital growth for 2019 slightly improved from 2018 levels by 10bps to minus 0.4 percent per year.

Total returns: Ecommerce boost 

Total returns for 2017 continued to improve to 7.9 percent per year, up 380 basis points from the 4.1 percent posted in the July survey. Some 55 percent of respondents said the major contribution to performance was higher industrial rental growth from positive ecommerce, while 27 percent cited income as the main factor.

Forecast total returns for 2018 also improved – to 3.4 percent per year, up from 2.4 percent in July. Various reasons were given for the performance: 27 percent cited higher interest rates; and 27 percent said yields would soften. Total return for 2019 was 3.6 percent per year, a slight improvemnet on 2018.

When considering why to invest in property, 73 percent of respondents said it was better value than bond yields; 45 percent said property income was important.


With the EU’s new MiFiD II financial regulations imminent, respondents were concerned about its effect. Some 72 percent thought the new rules would have an impact on the real estate sector, but  they were divided on how this would manifest, with forecast effects including: increased costs, consolidation for the real estate fund management business, less liquidity for listed real estate and a move to passive ETFs.

While returns have not crashed as expected in light of impending economic risks and Brexit, 64 percent of respondents did not feel that the UK property market was complacent. Reasons for this included an acknowledgment of rising interest rates, occupier market softness, a largely deleveraged real estate market and that yields now were at the same level as before the Brexit vote, so it was priced in.