UK commercial property capital value fall decelerates as yields stabilise

Capital values fell by -1.1 per cent across all UK Commercial property in May 2020, according to the latest CBRE Monthly Index. 

This was driven by a 3bps rise in yields and a -0.5 per cent decrease in rental values. Total returns were -0.6 per cent.

 
In May the trends seen in April continued: the rate of decrease in capital values eased, but the pace of decline in rental values accelerated, with some sectors seeing record falls. Yield expansion continues across all sectors but at a slower pace than previous months. Across the board total returns are significantly stronger than in April, despite remaining below 0 per cent for the majority of sectors.
 
The Retail sector reported a -1.7 per cent decline in capital values in May, compared to -3.6 per cent in April. All Retail subsectors reported significantly smaller decreases in values in May compared to the previous month. Shopping Centres reported the largest fall at -2.8 per cent whereas High Street Shops South East and Retail Warehouses both recorded the smaller decrease of -1.4 per cent. The Retail sector recorded rental value growth of -1.6 per cent. This represents the largest decrease in rental values for the sector in the history of the index. This figure was pulled down by Shopping Centres where rental values declined -2.3 per cent. Total returns for the sector were -1.1 per cent. Retail warehouses performed better than sector average with total returns of -0.8 per cent. Overall, Retail yields rose only 3bps in May, following a 17bps increase in April.
 
The Office sector has continued to show resilience. It recorded negative capital value growth of -0.6 per cent in May, a smaller decline than the previous month (-1.2 per cent). Rental values remained flat at 0.0 per cent. All Office total returns were -0.2 per cent. In May all Office subsectors recorded the same falls in value as the sector average, except Outer London and M25 offices which performed slightly better with capital values falling -0.5 per cent leading to total returns of -0.1 per cent. Office yields rose only 2bps over the month compared to 5bps in April.
 
For the third month running Industrials was the sector to boast the strongest performance. Capital values fell only -0.2 per cent over the month while Industrial Rental values moved into positive territory, growing by 0.1 per cent. Total returns were 0.2 per cent. This is the first time a sector has posted both rental value increases and a positive total return since the beginning of the Covid-19 lockdown in March. Industrials South East out-performed Industrials in Rest of the UK with capital values decreasing -0.1 per cent and rental values increasing 0.2 per cent. The rise in Industrial yields was only 1bp in May, from 3bps in April.
 
Toby Radcliffe, Research Analyst at CBRE, says: “CBRE’s May Monthly Index has shown signs that the immediate yield-driven reaction to the Covid-19 lockdown may be starting to abate. Declines in rental values are now picking up as the driver of negative performance, but overall value declines are easing. This is a promising sign, and as new measures to relax the lockdown are introduced throughout June there may be a hope that we are on the road towards more normal levels of market activity and performance.”