26th June 2015

Property stocks limited but investment potential is overflowing

Cushman and Wakefield’s latest Quarterly Marketbeat report paints a promising picture for UK commercial property investment and shows, as many suspected, that the market has continued to strengthen into 2015.

Healthy business and consumer confidence is delivering the fastest rising occupier demand in almost 20 years and that is applying upward pressure on rents across all sectors.

The biggest riser, unsurprisingly, was the office sector which saw rents soar by 6% over the year while industrial climbed 3.9% and retail 3.2%.

The overriding theme of the investment market is the continuing lack of available stock and that hasn’t been helped by people waiting to see the outcome of the recent General Election. However, the weight of demand and high prices being fueled by intense competition is motivating many to now consider selling.

Activity is also being boosted by the resurgence of the financing market, with banks and other financial institutions once again actively looking for opportunities to lend to across a range of sectors and markets.

Retail becomes top target for investors

Retail is perhaps the biggest surprise of 2015 so far. Prime high street assets in key market towns and major regional hubs have become a top target for UK funds and institutions and overseas private equity as they still offer good prospects for capital and rental growth.

Cushman and Wakefield’s research shows that the rising consumer confidence and solid occupational performances seen in recent months have dramatically improved investor appetite and, while the South East remains the most popular destination, key regional hubs like Birmingham, Leeds and Edinburgh are being considered in the hunt for solid capital and rental growth.

Shopping centre demand also remains high and we are now also seeing a lot of private equity buyers looking at the secondary market and the larger lots.

Office sector fueled by rental growth

The top performer this year will be the office sector and that will be primarily driven by rental growth due to the lack of stock. Well-located and good quality secondary stock along with offices with redevelopment potential will see the strongest demand from investors.

In the regions, there is still room for further rental growth and yield compression due to strengthening fundamentals. Well-located and good quality property in the secondary market is also expected to remain attractive due to the potential for capital growth.

Another top target for investors in the office sector will be properties with potential for redevelopment or asset management opportunities in the areas of high occupier demand.

E-commerce driving growth in industrial

A lack of space will also be the driving factor in the industrial sector and investment appetite will remain strong. The growing demands of occupiers, with internet retailers at the front of that queue, will deliver strong rental growth. ,.

For investors, opportunities are starting to come through from landlords keen to sell assets acquired within the last 3- 5 years, where they can realise profit already. Many have also started speculative development, buoyed by growing demand from occupiers.

Look to the north for rental growth

Perhaps one of the most interesting aspects in the report is the predictions for rental growth and average prime yields around the country for the next 10 years. It throws out some encouraging news for investors, but also has some surprises.

Looking across the UK and the regions in the north are in the best position for delivering rental growth. In the North, North West and Yorkshire and the Humber, investors can expect to see average rental growth of around 5% in retail over the next 10 years, 5.4% in the office market and 4.2% in industrial.

When considering average prime yields, the same three regions are strong performers again and have seen little in the way of compression over the past 12 months when compared to the rest of the country.

Perhaps most surprising though is that Cushman & Wakefield recently predicted that the South West will see little or no growth in each sector over the next ten years because the market has become so overinflated.