Capital value fall decelerates as yields stabilise

Rental value trend continues to weaken

Capital values fell by -1.1% 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% decrease in rental values. Total returns were -0.6%.

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% for the majority of sectors.

The Retail sector reported a -1.7% decline in capital values in May, compared to -3.6% 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% whereas High Street Shops South East and Retail Warehouses both recorded the smaller decrease of -1.4%. The Retail sector recorded rental value growth of -1.6%. 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%. Total returns for the sector were -1.1%. Retail warehouses performed better than sector average with total returns of -0.8%. 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% in May, a smaller decline than the previous month (-1.2%). Rental values remained flat at 0.0%. All Office total returns were -0.2%. 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% leading to total returns of -0.1%. 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% over the month while Industrial Rental values moved into positive territory, growing by 0.1%. Total returns were 0.2%. 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% and rental values increasing 0.2%. The rise in Industrial yields was only 1bp in May, from 3bps in April.

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.
Toby Radcliffe, Research Analyst, CBRE