Returns from retail property have hit a five-year peak as consumer spending continues to drive a recovery in regional real estate values.
According to the latest IPD UK Quarterly Property Index total returns rose to 4.3% from 2.6% in Q1. Retail capital values increased by 2.9% – more than double the 1.2% growth seen during the first quarter of 2014.
Boosted by retail’s resurgence, returns for commercial property as whole grew to 4.7% for Q2, their highest since Q1 2010. For the same period bonds and equities delivered 0.9% and 3.4% respectively (JP Morgan 7-10 year/MSCI UK).
Retail performance continues to lag offices and industrial property which delivered 5.3% and 5.4% respectively. Yet retail returns demonstrate a rising level of confidence among investors.
Enhanced performance across the regions also underlines their willingness to look for value outside of London. The top three regional retail districts were the South East, West Midlands and North West, based on total returns for Q2.
Improving returns from shopping centres and retail warehouses have driven much of the rise. Shopping centre values grew by 3.7% in Q2, against 0.3% in the previous quarter, while retail warehouse values rose by to 3.0% from 1.0%.
Some doubts still hang over the retail sector – focusing on delicate consumer confidence and the potential for further restructuring of retailers’ portfolios. Retail values remain almost 29% below their 2007 peak, compared with 20.8% for offices.
According to Insolvency Service statistics to June 2014, while liquidations have fallen gradually since the recession, the levels of administrations and voluntary arrangements have remained relatively constant for the last five years.
Occupier demand for the retail sector also remains relatively muted, particularly outside of London. Rental growth at the headline level was just 0.1% for the sector, against 1.7% for offices and 0.5% for industrial assets. Even in the shopping centre and retail warehouse markets, rents remained flat for the quarter.
As result, the majority of growth in the retail sector has been yield driven – through increasing investor confidence and competition for assets. This in turn has been driven by investors looking beyond office and industrial assets, which in core regional markets have become increasingly expensive.
Headline office yields dipped below 5% in Q2 for the first time since December 2007, a result of rapidly rising values, which have grown by 15.1% over the last twelve months. In the South East, values have risen by 16.2%.
Similarly, industrial values in the South East have risen by 14.1% over the last twelve months, and 11.9% around the rest of the UK.
Phil Tily, Executive Director & Head of UK and Ireland, IPD, says: “The latest results confirm that the recovery is taking hold throughout the UK property market, and that investors’ appetite for real estate across the country is continuing to strengthen.
“Coming alongside the latest good news about GDP, rising returns in the retail sector are of particular importance – finally showing rising performance in a sector where good news has been limited since the recession. While occupier demand remains cautious, investors looking for assets with value add opportunities will hope this quarter’s results are the beginning of a sustained recovery period for the sector.”