UK property income returns “ever more attractive” to investors – Cushman & Wakefield
Income returns from UK property “are looking ever more attractive to a raft of income-hungry investors,” says Cushman & Wakefield in its August Marketbeat report, as they remain around the 7.0% level compared with 10-year bond yields of less than 3%. Demand from investment buyers has remained robust, although a previously expected rise in offerings failed to materialise and this dampened investment activity overall for the second quarter. C&W notes that, given the scarcity of prime assets, secondary markets have seen something of a revival – although the focus has been on near-prime rather than weaker secondary markets. “There is more interest coming from UK funds and property companies for second-tier or short-income London offices in particular. Second-tier retail warehouse parks and industrial units are also seeing more interest than was the case at the start of the year, although this has been largely confined to London and the South East,” it adds.
The availability of credit is still restricted – C&W says UK lenders are still in restructuring mode and have reserved any new lending for core assets only, and does not expect to see any significant improvement in lending terms in the short term.
Looking at the industrial sector, C&W sees more positive sentiment starting to emerge, with higher enquiries year-on-year and the reactivation of some previously shelved requirements. However, there is a large disconnect between occupier requirements and the type of stock available – leading many occupiers to pursue design-and-build strategies. There are a few very location- and user-specific prelets, and “sporadic” signs of speculative development, the firm notes. Rents have remained static and incentives have generally remained unchanged. One notable exception to this is the market in Enfield, where rental growth was 3.5% during the second quarter: the occupational market at Heathrow has also continued to tighten.
The market for office space outside Central London remains fragile, C&W says, with occupiers remaining risk-averse and active demand generally thin overall. The firm does note some instances of positive activity: it says Glasgow out-of-town uptake was strong at 200,000 sq ft in Q2, and sentiment in the Thames Valley remained positive, with the TMT sector supporting the market. Grade A availability has declined slightly overall, but this has not been enough to trigger new speculative development. Within Central London, the West End has continued to perform well while there are signs that the City market has become more cautious.
The retail market is a two-tier story, with Central London retail properties still much in demand from occupiers – notably large US brands – and overseas private investors, particularly in the prime areas of the West End, where supply is especially tight. This has led to some “significant premium values” for the sale of existing leasehold interests in certain areas. Prime rents are expected to continue to grow as a result, C&W notes. At the regional UK level, demand is more subdued, but C&W still sees a “reasonable” level of activity in the better centres and market towns in Greater London and the South East. Supply increased marginally overall with prime rents generally static. “Indeed, in the 12 months to June, the only two regions to experience rental growth were Scotland at 1.65% and the South East at 4.01%,” it notes. For shopping centres, the occupational market has seen continued reasonably strong demand, while investment demand for prime centres held up during the second quarter. Out of town, however, retailers remain under pressure from rising costs and flat or lower sales volumes.
