Domestic deals decline as yields continue to drift out – DTZ
The proportion of property transactions accounted for by domestic investors during the second quarter dropped to just 39%, says DTZ – the fourth quarter in a row that this figure has declined. The level of UK domestic transactions was £3.2bn in Q2, the lowest figure since Q2 2009. And outside London, domestic purchases were the lowest on record at £1.4bn.
“Domestic funds are now typically seeking annuity-type prime investments with 20 years or more of unexpired income,” says DTZ. “This accounts for very few available properties, limiting transactions volume.”
Returns from all three major property sectors continued to trend downwards during June, says DTZ, as yields continued to move outwards. All Property quarterly total returns fell to 0.33%, made up of 1.63% income returns and minus 1.29% capital growth. Most of the negative impact is the result of equivalent yields moving out a further 5 basis points to 7.34% in June, DTZ notes.
By sector, retail property continued to underperform in June, driven by weakness in shopping centres – particularly those outside the South East, where capital values fell 3.91% in the quarter to June. Total returns for the offices sector were 0.82% for the quarter while for industrial properties they came in at 0.97%.
Office returns were boosted by a strong rental growth performance of +0.27% compared with minus 0.13% for industrial property. This was driven by Central London offices, where TMT demand is strong. Outside London, the market is much weaker and/or negative, DTZ says.
Rents for industrial properties are falling, despite significant lettings to the automotive sector during the second quarter, and the increasingly limited availability of Grade A industrial space. Nevertheless industrial returns outperformed other sectors in June thanks to a higher sector income return component, the firm notes.
