Industrials report record low yields while Offices experience an uptick in rental values

Industrial yields moved in 17bps to reach lowest recorded average prime yield for the sector of 4.6%

CBRE’s latest Prime Rent and Yield Monitor showed a quarter of rental growth across the Industrial and Office sectors with average All Property prime rents rising 0.4% in Q1 2021, the first increase since Q1 2020. At the All Property level yields moved in 3bps over Q1 2021, driven by falling yields in the Industrial sector. The pronounced trend of sectoral divergence throughout 2020 continued into the first quarter of 2021 with Offices and Industrials reporting significantly stronger performance than Retail.

Industrial prime rents increased 1.1% in Q1 2021, the largest quarterly increase since Q1 2020. London Industrials reported rental growth close to the sector average at 1.0%. This compares to 2.3% in the Rest of UK (excl. SE and Eastern), demonstrating that growth in tenant demand is strong across the country. In terms of yields, Industrials posted a strong quarter with prime yields moving in 17bps taking the All Industrial yield to 4.6%. In London, yields fell 19bps to 3.8% setting a record for the lowest Industrial yield in the monitor’s history and highlighting continued strong investor appetite in the sector.

Over Q1 Office prime rents rose 1.1% the greatest monthly increase since Q1 2016. This represents a small rebound after declines in rental values over the previous three quarters totalling a fall of -3.4%. In Central London rental values rose 1.5% driven entirely by the West End. This comes after a considerable fall in rental values in Central London over the last three quarters (-7.6%). This uptick hints at optimism in the market as lockdown restrictions ease. In Q1 2021, the Office sector reported a 1bp decrease in yields, bringing the All Office yield to 5.3%. Notably, yield contraction was mostly confined to Central London at -3bps and the East at -18bps In contrast, in the Rest of UK (excl. SE and Eastern) prime yields rose an average of 2bps indicating that investors are still more attracted to offices in and around the Capital.

Retail rental values continued to fall in Q1 2021 but these declines were of a smaller magnitude than during most of 2020. High Street Shops and Retail warehouses saw declines of -0.8% and -2.2% respectively. Declines were not universal with Bulky Goods retail warehouses reporting a 1.6% rise in values. This reflects this subsector’s relative resilience to the pandemic as a provider of essential and home improvement goods. Prime rental values for Shopping Centres were unchanged over the quarter. However, this reflects a lack of transactional evidence rather than a bottoming out in rental values, with further falls likely when the market is more liquid. On the investor side, Shopping Centre yields moved out 51bps in Q1 to 7.7%. Over the quarter High Street Shop yields moved out 11bps to 6.8%. Retail Warehouse prime yields reported a decrease of -1bp to 8.4%. Although only a marginal decrease this is promising news marking the third consecutive quarter not to report rising yields, suggesting prime Retail Warehouse yields have reached a level attractive to investors.

The Q1 2021 data revealed reasons for optimism in the year ahead. The Industrial sector continues to perform well posting ever lower yields. The movement of Industrial yields in London to a level lower than any Office subsector highlights the current intensity of investor interest in the sector. Meanwhile, Office rents experienced an uptick after three successive quarters of decline hinting at occupier optimism as lockdown restrictions ease. In contrast, Retail continues to report falling prime rents, perhaps unsurprising considering all non-essential retail remained closed over the quarter. However, even here there is reason for optimism with Bulky Retail Warehouses reporting rising rents and attracting investor interest.
Toby Radcliffe, Research Analyst, CBRE