Continued volatility in the market leading to a swing towards prime
Yields up (and down)
The broad trend last month was mainly one of more of the same, with yields rising a quarter-point across retail warehousing and leisure. This brings our average prime yield to 4.90%, its highest level since November 2016.
We expect this trend to continue for the remainder of this year, as while opportunistic investors are becoming increasingly active studiers of the UK retail market, transactional volumes remain at near-record lows as they wait to strike at the ‘right price’.
The one exception to the trend of the last 12 months was in the City of London office market, where we have moved the prime yield down from 4.25% in June to 4.00% in July. This move has been supported by the sale of 8 Finsbury Circus to Singapore based Stamford Land for £260m, representing a net initial yield of 4%. The depth of interest and the eventual price achieved on this asset indicates that there is a still a significant depth of demand for prime London assets, which may well be boosted in the second half of 2019 by the recent weakening of sterling.
This swing towards prime is echoed by the trends from the latest MSCI quarterly results, which show a widening performance gap across many sectors between the best and worst asset types and locations.
Regional office occupational markets remain strong
While take-up in the London office market in the first half of 2019 was down year-on-year (30% in the City and 6% in the West End), the major regional cities have continued to show strong occupational demand against a background of increasingly tight supply.
Given that 2018 saw the best ever year of take-up in the top 10 regional cities, it is impressive that this has continued into the first six months of 2019, with 3.2m sq ft of take-up (0.3% higher than the same period in 2018).
This strong tenant demand continues to be led by the TMT sector, which accounted for 19% of all regional office take-up in the first half of 2019. However, serviced office providers have become increasingly acquisitive in the regional cities over the last six months, taking just over 700,000 sq ft of office space (17% of H1 2019 take-up).
We expect this trend to continue in the second half of the year, and into 2020. This is a replication of the trend that has been seen in the central London office market over the last five years, where serviced office provider activity peaked at 18% of take-up in 2017.
The comparative lack of speculative development activity that has taken place in the post-GFC period in the major regional cities has driven Grade A supply to record low levels in some cities. For example, in five of the top 10 regional cities, the Grade A availability is now less than one year’s average take-up of prime office space.
This undersupply situation is putting firm upward pressure on prime office rents in many locations, with record-high office rents being achieved in Birmingham, Cambridge, Leeds, Manchester, and Oxford.
More has been written in the last few years about the troubles in the retail sector than any other segment of the property market. The focus of blame usually swings from the internet to business rates to greedy landlords, but one area that seldom gets attention is the shopper’s insatiable demand for a bargain. The rise of fast fashion (a trend that seems at odds with the rise in interest in CSR), has led to huge price competition in the fashion space, which has been further intensified by competition from online retail. This trend is exemplified by the most recent BRC Nielsen shop price indices, which show that since December 2005 Clothing & Footwear prices have fallen by 55%. This, more than any other statistic, might explain why there has been such significant downward pressure on store portfolios and rents in recent years.