Retail and Central London Offices continue to see rental values fall. Industrial sees another strong performance in Q4

Industrial yields moved in 18bps to reach lowest recorded average prime yield for the sector of 4.8%

CBRE’s latest Prime Rent and Yield Monitor showed another quarter of decline in rental values across the Retail and Office sectors with average All Property prime rents falling -0.5% taking the decline over 2020 to -7.5%. At the All Property level the trend of rising yields ongoing since Q2 2018 was reversed with yields moving in 6bps over Q4. However, over 2020 average prime yields moved out 17 bps. There was significant variation in performance between sectors over the quarter and the year in both rent and yield movement.

Industrial prime rents increased 0.3% in Q4. Every quarter of 2020 reported a modest increase in rental values showing robust occupier demand in the sector throughout the year. Over the quarter the East and West Midlands posted the greatest increases in rents at 1.6% and 1.3% respectively. In terms of yields, Industrials fared well over Q4 with prime yields moving in 18bps. This is the largest inward movement since Q2 2017 and takes the All Industrials prime yield to 4.8%, its lowest level in the 50-year history of the monitor. This reflects the strong investor appetite in the sector which has been resilient to the disruption caused by the Covid crisis. In Q4 yields for London Industrials moved in 22 bps to 4.0%.

Over Q4 Office prime rents decreased -0.7%. The decline was more pronounced in Central London where rental values fell -1.5% over the quarter and -7.6% over the year, reflecting a pause in occupier interest in the market as a result of the pandemic. However, this fall has not yet been seen in Key Provincial Cities where rents grew 1.2% in Q4 and 4.2% over 2020. In Q4 the Office sector reported a 5bps decrease in yields at the All Office level. This was driven entirely by Central London where yields moved in 11 bps. In contrast to the falling rents, the strengthening of Central London yields indicates that investors see the disruption to tenant demand as temporary. Offices in the Rest of the UK in contrast (excluding South East and Eastern) saw yields increase 9bps over the quarter. indicating a possible ‘flight to quality’ from investors in the capital.

Retail rental values continued to fall in Q4 but at a lesser rate than the previous two quarters. High Street Shops and Shopping Centres saw declines of -0.8% and -5.0% respectively (-24.9% and -28.4% respectively for the year). Meanwhile rental values for Retail Warehouses were unchanged over the quarter making the annual fall 19.6%. On the investor side, Shopping centre yields moved out 47bps in Q4 to 7.5%, the highest yield for the sector in the history of the monitor. Over the quarter High Street Shop yields moved out 24 bps to 6.9%. In contrast Retail Warehouse yields decreased 6bps to 8.2% indicating pricing for the subsector may have reached a level attractive to investors.

Many interesting themes emerged from the Q4 data that hint at prospects for 2021. Industrial yields strengthened to record lows, as investors jostled for access to the sector as it enjoys sustained growth in tenant demand. In Retail by contrast, rents and yields are still being challenged – but the inward movement in Retail Warehouse yields is interesting; more investors may begin to see value in this market, which has been more resilient than High Street Shops and Shopping Centres to the Covid-influenced change in shopping patterns, and which also offers conversion potential. Meanwhile in Offices, investors have bid London yields downwards even as rents continued to slide, suggesting a ‘flight to quality’ for capital that over the medium to long term sees little significant threat to demand for office space.
Toby Radcliffe, Research Analyst, CBRE