Robust rental growth and declining yields at All-property level are evidence of a post lockdown rebound in values

In Q2 2021 All Property average prime rents grew 0.9% as yields decreased 16bps

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 0.9% in Q2 2021, the strongest growth since Q4 2017. At the All Property level yields moved in 16bps over Q2, the greatest fall since Q4 2014. This was driven by falling yields in the Industrial sector and Retail Warehouses.

Industrial prime rents increased 1.5% in Q2, the largest quarterly increase since Q1 2020. London Industrials reported rental growth slightly above the sector average at 1.8%. This compares to 3.1% 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 the South East and Eastern where growth was only 0.5% and 0.4% respectively, dragging down the All Industrials average figure. In terms of yields, Industrials posted another strong quarter with prime yields moving in 16bps taking the All Industrial yield to 4.4%. In London, yields fell 6bps to 3.8%, making yields for London Industrials 39bps sharper than for Central London Offices reflecting the high demand for last mile logistics.

Over Q2 Office prime rents rose 1.4%, the greatest monthly increase since Q1 2016. This shows a continuation of the Q1 2021 rebound in rental values following declining values throughout 2020. In Central London, values rose 1.8%. This was mainly driven by West End rental growth of 3.8% and Mid-Town growth of 1.7%. This marks Mid-Town’s first quarter of rental growth since Q2 2017. No UK region reported falling rental values demonstrating a continued bounce back in rental values into Q2 as restrictions eased. On the Investor side, the Office sector reported a 3bps increase in yields in Q2 2021. This was driven by yield rises in the East and West Midlands, posting 21bps and 11bps increases, respectively, as well as 12bps increase in Yorkshire & Humberside. Conversely, Central London yields fell by -1bps, driven mainly by a 7bps prime yield contraction in Mid Town.

Retail rental values continued to fall in Q2 2021 but these declines were of a smaller magnitude than during most of 2020. Shops and Retail Warehouses both saw declines of -0.4%. The Retail Warehouse Sector continued to be the only sector reporting any rental value growth within its subsectors; Bulky Goods Retail Warehouse prime rents increased 0.4% and rents for Retail Warehouses in London, the South East and Eastern increased 1.0%, the largest growth since Q1 2016. On the investor side, Retail Warehouse yields moved in 28bps in Q2 2021 to 8.1%. The last quarter to see a greater decrease in yields for the sector was over a decade ago (Q1 2010). Over the quarter, Shop yields remained unchanged at 6.8%, although within this there was significant regional variation. For example, yields for Suburban London moved in 16bps, suggesting yield expansion over the last several quarters was overstated. Meanwhile, prime yields for South East and North East shops moved out 13bps and 17bps respectively. Shopping Centre yields moved out 12bps to 7.8%.

Q2 2021 provided further evidence that a rebound in values is underway, posting the greatest increase in rents and decrease in yields at the All-property level in several years. This is an indication of increasing demand from tenants and optimism from investors as lockdown restrictions ease. However, the effects are not being felt equally across the sectors with Industrials and Offices reporting robust growth in prime rents while Retail continues to post declines in value. Nonetheless, there are signs of positivity in the Retail market on the investor side with stable yields for Shops and declining yields for Retail Warehouse suggesting that retail pricing may now be becoming attractive to investors.
Toby Radcliffe, Research Analyst, CBRE