Covid-19 leads to sector divergence in UK Prime commercial property performance

In Q1 2020 All Property average prime yields increased 10bps

CBRE’s latest Prime Rent and Yield Monitor clearly shows the varying levels of resilience to the effects of Covid-19 on commercial real estate. While average rental value growth across UK prime commercial property was 0.1% for the quarter and the average prime yield increased by 10bps in Q1 2020, this figure masks the significant variation in performance between sectors.

All sectors reported increasing yields in Q1 2020. Industrial average prime yields rose by 2 bps. Rest of UK Industrials (excluding Eastern and South East) increased further at 6 bps. Average prime yields across the Office sector also increased 2bps. Central London offices were unchanged over the quarter. In contrast to the modest increases seen by Industrials and Offices, Prime yields for High Street Shops weakened considerably, increasing 45 bps taking the average yield to 6.3%. Shopping Centre and Retail Warehouse yields moved out 53bps and 13bps, respectively.

On the occupational side, Industrials was the strongest sector in the first quarter of 2020, reporting prime rental growth in excess of that seen in the previous quarter. Average prime rental value growth for Industrials was 1.9% in Q1 2020. In London, Industrial prime rents showed solid growth at 2.3%, only slightly less than growth in Q4 2019. In the Rest of UK (excluding Eastern and South East), Industrial prime rents increased by 2.1%, significantly more than last quarter. This was driven by activity in the East and West Midlands where prime rents increased by 4.9% and 5.8% respectively.

Prime rents also continued to rise in the Office sector, albeit at a more modest rate. Offices recorded growth of 0.5% over the quarter. All Central London prime rents were unchanged in Q1 2020. In contrast, Offices in the Rest of UK (excluding Eastern and South East) rose by 0.9%. Within this, Key Provincial cities stood out, increasing 1.9%.

The trend of falling Prime rents across all Retail sectors accelerated in Q1 2020. Retail Warehouses saw the biggest fall at -3.4%, while Shopping Centres fell -1.5%. High Street Shops fell -1.0%. East and West Midlands were hit hardest, declining -7.4% and -5.7% respectively. No region reported positive growth over the quarter.

Covid-19 has exacerbated the Retail sector’s problems, both on the occupational and investor side; falls in rents and rises in yields have continued at an accelerated pace. Thus far, the Office and particularly the Industrial market is proving more robust. However, Q1 figures only capture two weeks of the sustained lockdown period and should therefore be interpreted with caution – it may be that more significant changes occur in Q2 2020.
Toby Radcliffe, Research Analyst, CBRE