Improving Retail Performance boosts Commercial Property Returns

Posted on 8 August, 2014 by Neil Bird

The retail market saw returns hit a five-year high during Q2 as consumer spending drives the resurgence in values.

Returns jumped from 2.6% during Q1 to 4.3%, according to the latest IPD UK Quarterly Property Index. During the same period, capital values in the sector increased by 2.9%, more than doubling the growth seen in the early part of the year.

Improving-Retail-Performance-boosts-Commercial-Property-Returns

This improved performance contributed to overall commercial property returns growing to 4.7% during Q2, the best result since the first quarter of 2010.

And the resurgence was not restricted to London, with investors demonstrating a willingness to look for value in the regional markets. Based on total returns during the quarter, the leading regional retail markets were the South East, the West Midlands and the North West.

However, despite the encouraging results, the retail sector continues to trail behind office and industrial property, which delivered returns of 5.3% and 5.4% respectively. In addition retail values remain 29% below their 2007 peak.

Another note of caution is that, outside London, administrations continue to trouble the sector and occupier demand has not significantly improved.

Furthermore, rental growth in the retail market was just 0.1% compared with 0.5% for industrial property and 1.7% for offices. Consequently, the leading driver of growth in the sector has been through improving yields.

Nevertheless, the figures demonstrate that investors are beginning to look at assets other than office and industrial property, and to consider locations outside the core markets, pointing towards the continuing slow recovery of the sector.

Phil Tilly, of IPD, believes the results confirm an improvement in investor appetite and that the recovery is now taking hold throughout the UK property market.

“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,” he said.

“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.”




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