Investment volumes show slight fall with Prime yields expected to shift outward slightly in 2019
Volumes above average
Investment volumes for UK Commercial real estate reached £62.1bn in 2018. This represents a fall of 5.7% year on year but a rise on the three year rolling average of £59.8bn.
Investment Volumes slight fall but above three year average
Source: Savills Research, Property Data
Given the continued political uncertainty around Brexit and the cooling of some global economics market this should be seen a strong message the UK real estate remains a liquid and desirable investment.
Whilst the overall investment volumes paint a robust picture it is worth noting that all sectors, aside from leisure and alternatives, saw a decline in investment. Alternatives and mixed-use accounted for 29% of all investment, the highest proportion ever recorded.
Interestingly, and somewhat surprisingly, given the positive news surrounding the industrial sector both volumes and market proportion declined year on year. Given the creation on prime stock is now dominated by a handful of companies who hold for income rather than trade it is difficult to see how volumes can increase by the same proportions as occupier demand has in the sector.
This weight of capital has resulted in little overall volatility in prime yields with the average yield maintained at 4.77% for the third month running, reflecting an outwards shift of 25bps since January 2018.
With numerous retail sectors showing outward pressure and no sectors expecting inward yield movements we expect our prime yield to continue edging outwards into 2019.
Savills prime yields
Source: Savills Research
CHRISTMAS RETAILER PERFORMANCE WAS MIXED, BUT NOT THAT BAD
There’s no point denying that market conditions are tough for retailers and landlords. But, it’s not solely down to consumers cutting their spending. Yes, consumer confidence has taken a hit due to the continued Brexit uncertainty yet retail spend for December was up 3.8% and 3.1% in value and volume terms respectively on 2017.
While sales value growth did slow over 2018 due to slowing inflation, volume performance (often considered a better indicator of consumer appetite to shop) remained pretty robust with the 2.9% reported for December up on the 2.0% reported for December 2017. Whilst the latest figures from the ONS show the pace of online growth is slowing much of the growth for retailers was driven by online as sales volumes in December grew 17.9% as opposed to a 0.6% growth for in-store. Yet let’s not forget that this growth is off a lower base with the majority of retail transactions still taking place in stores.
Whilst owners of retail real estate will be reflecting on what this means for 2019 the owners of industrial and logistics property are struggling to keep pace with demand.
Take-up for warehouses units over 100,000 sq ft reached 34.1m sq ft which is 8m sq ft more than the year before. Of this 53% was let directly to retailers. We expect this trend to continue in the short to medium term as many retailers commit to significant investments in their supply chains. Both Next and Marks & Spencer have publicly stated their intentions to invest hundreds of millions in their supply chains in the coming years. Whilst the speculative development market has reacted and is now delivering the highest amount of new space since 2006 the level of occupier demand is currently strong enough to absorb this space, although we do expect significant volatility in vacancy rates which could mean rental growth stutters in certain markets.
Retail Christmas sales better than expected
Source: Savills Research; retailer reports; Kantar WorldPanel
Property compared UK Real estate at top of the pile
Source: Thomson Reuters
UK REAL ESTATE WELL POSITIONED COMPARATIVELY
As demonstrated in the second graph above UK real estate has performed remarkably well compared to other global asset classes, with UK industrials leading the charge with 12 month returns of 17.4%. Of course the weakening of Sterling will have had an impact but the fundamentals remain strong. With little risk of over development in many sectors and occupier demand in many markets reaching surprisingly high levels 2019 may see certain sectors repeat this performance.