Increased All-Property rental growth and yield contraction demonstrate continued rebound in values

Both Industrial and Office rental values have surpassed pre-pandemic levels

CBRE’s latest Prime Rent and Yield Monitor showed a quarter of rental growth across the Industrial, Office and Retail sectors with average All Property prime rents rising 1.5% in Q3 2021, the strongest growth since Q1 2016. At the All-Property level yields moved in 14bps over Q3. This was driven by falling yields in the Industrial sector and Retail Warehouses.

Industrial prime rents increased 2.0% in Q3, the largest quarterly increase since Q3 2019. London Industrials reported rental growth slightly below the sector average at 1.9%. This compares to 2.6% in the Rest of UK (excl. SE and Eastern), demonstrating that growth in tenant demand is strong across the country. Two of the weakest performing markets were Yorkshire & Humberside and North East, both reporting zero rental growth across the quarter, and pulling down the All Industrials average figure. In terms of yields, Industrials posted another strong quarter with prime yields moving in 23bps taking the All Industrials yield to 4.2%. In London, yields fell 23bps to 3.5%, making yields for London Industrials 78bps sharper than for Central London Offices, reflecting the high demand for last mile logistics.

Over the quarter Office prime rents rose 1.4%, a slight deceleration from the 1.7% increase reported in Q2 2021. This growth shows a continuation of the H1 2021 rebound following the decline in values throughout 2020 and All Office rental values have now recovered to beyond the pre-pandemic levels recorded in Q1 2020. In Central London, values rose 2.2%. This was mainly driven by rental growth in the West End and Southbank of 3.4% and 4.0% respectively. Rental values for City, Docklands and London Fringe Offices were all unchanged from Q2. No UK region reported falling Office rental values, demonstrating a nationwide bounce back in rental values into Q3 as confidence increased. On the Investor side, the Office sector reported a -5bps fall in yields in Q3 2021. This was driven by yield sharpening in West End, Wales and Scotland, posting -19bps, -17bps and -14 bps respectively. Conversely, the only two subsectors reporting yield expansion were East Midlands and West Midlands, increasing by 9bps and 7bps, respectively.

Q3 2021 was the most positive in some time for Retail. High Street Shop rental values remained flat, the first quarter not to report declining values for the sector since Q4 2017. Shopping Centre reported rental growth of 0.4%, the first positive growth since Q2 2018. The growth for Shopping Centres was driven by a number of prime locations in London, SE and the East where values have started to rebound after several quarters of significant value decline. In contrast, Shopping Centres in the Rest of the UK reported a -0.7 decrease in rental values. Retail Warehouse Sector rents rose 1.5% over Q3, driven by positive growth across all of its subsectors. Retail Warehouse rents in the Rest of UK outperformed those in London, SE and Eastern, increasing 2.2% and 0.8%, respectively. This is the greatest rental increase for Rest of UK Retail Warehouse rents since Q4 2008. On the investor side, Retail Warehouse yields moved in 25bps in Q3 2021 to 7.8%. Over the quarter, Shop yields fell by 1bp, although within this there was significant regional variation. For example, yields for South East moved in 25bps, suggesting yield expansion over the last several quarters may have been overstated. Meanwhile, prime yields for Suburban London shops moved out 15pbs. Shopping Centre yields remained unchanged from Q2 2021.

Q3 2021 reported a continuation of All-Property rental growth and yield contraction, both at an increased rate from Q2 2021. Retail reported the strongest rental performance in several years, signaling increased consumer confidence in Q3. However, rental values for Retail are still someway below their pre-pandemic levels. In contrast, Industrials, and to a lesser extent Office values, have now surpassed their pre-pandemic peak. It is yet to be seen whether the rebound in values will continue to accelerate in Q4 or whether the energy and supply chain crises will dampen this growth.
Toby Radcliffe, Research Analyst, CBRE