The last year has seen a marked shift in the commercial property markets in the UK, powered by improved economic fundamentals which drive the underlying occupier base, according to new reports.
The broad based improvement in economic growth, aided by low inflation, has seen improvements in both consumer and business confidence, which should lead to rental growth where demand outstrips supply, says the latest analysis from Cluttons.
The firm’s Commercial Property Market Outlook report indicates that the industrial sector is now showing similar performance to offices, as Cluttons predicted last year.
Office total returns for the past 12 months are at 23% with capital growth of 16.8%, compared to the industrial sector which has delivered a total return of 22.7% bolstered by capital growth of 15.1%, driven primarily by yield compression.
‘As we forecast last year, sheds are now matching offices for performance. One reason is that prime logistics take-up has improved over the past year, driven by manufacturers, especially in the automotive sector, and retailers with supply constraints in key locations,’ said John Barrett, head of valuations at Cluttons.
‘Apart from the strong supply/demand fundamentals aided by supply shortages due to a lack of speculative development in recent years, the case for investment in the industrial sector is helped by low obsolescence and the squeeze on land supply from higher land value uses. This is especially the case in London and the south east,’ he explained.
‘With prime yields now stabilising across most markets, income growth is replacing yield compression as the primary driver of future performance. Average income return is at 6%, so it’s still a good time to invest in property,’ he added.
‘However this is not universal. Tricky’ secondary property remains hard to sell across all market sectors and this may present opportunities for investors prepared to take risks for higher returns,’ he concluded.
Meanwhile, the latest research from real estate advisor Savills shows that UK commercial property returns continue to remain attractive in comparison to other asset classes as average prime yields stay stable for the third consecutive month at 4.59%.
Savills Market in Minutes report found that the average total return on UK commercial property stands at 18.63% to the end of the first quarter of 2015, in stark contrast to oil, copper and gold, which offer returns of -42.57%, -16.4% and -8.9% respectively.
The firm predicts that due to the strong level of demand property should continue to outperform many other asset classes this year.
The report suggests that against this backdrop of stability, a split between property asset classes is set to emerge over the next three months.
At present, in the office market the gap between prime regional yields at 5% and prime city of London yields at 4.25% is historically narrow. Still, it is likely that central London office yields will harden in the near future, primarily due to the weight of money that is targeted at larger office lots in the UK, something that is easier to find in the City in comparison to elsewhere.
The research states that there is still a degree of over pricing of risk in the secondary market and this will be where the strongest returns will be achieved over the next 12 months.
Savills finds that when compared to non real estate investment, commercial property is showing lower volatility, with returns outperforming equities, bonds and commodities. Furthermore, the possible threat of further deflation, which will result in rates reaching record lows, is likely to further boost the rationale for investing in property.
‘In the current macro-economic climate, commercial property remains a popular choice for savvy investors, surpassing other asset classes in providing substantial returns,’ said Mat Oakley, commercial research analyst at Savills.
‘However, as we approach May’s general election, the primary risk for property is the removal of political consensus around fiscal consolidation and bringing down the deficit. A lack of clarity would undoubtedly be a drag on investor confidence,’ he added.