UK commercial property returns 6.3% in 2018 with mixed fortunes for the Retail and Industrial sectors

UK commercial property capital values fell -0.5% in December, according to the latest CBRE Monthly Index. Rental values fell by -0.1% overall over the month. Total returns, capital values and rental values were all recorded as negative in the same month for the first time since May 2012. At the All Property level, total returns were 6.3% for 2018 as whole, driven by income returns of 5.4%. Rental values increased 0.5% over the year.

Over December the Retail sector experienced a fall of -2.2% in capital values while rental values declined by -0.6%. Overall sector performance was pulled down by capital value falls for Retail Warehouses (-2.6%) and Shopping Centres (-2.5%). High Street Shops reported a -1.3% fall in capital values in December. In 2018 as a whole, the Retail sector experienced a fall of -7.4% in capital values and -2.6% in rental values. While High Street Shops and Retail Warehouse capital values fell -3.4% and -8.2% over the year, Shopping Centres reported a double-digit decline of ‑10.5%. Total returns for the sector were -1.8% for 2018, the first negative 12-month return since 2012.

Capital values in the Office sector increased 0.3% in December 2018. In Central London capital values fell by -0.4% pulled down by both the City (-1.2%) and West End & Midtown (-0.4%) submarkets. Rental values increased 0.2% over the month. Even so, the Office sector finished the year strongly, with total returns of 7.9%, capital growth of 3.1% and rental value growth of 1.6%. Rest of UK Office total returns of 11.5% for 2018 were over double that reported in Central London (5.3%).

Industrial sector capital values increased 1.0% over December, pulled up by an increase of 1.3% in the South East. Rental values increased 0.3% over the month. Industrial sector total returns reached 18.1% for the whole of 2018, thanks to capital value growth of 12.4%, and outperforming all other main sectors for the year. South East Industrials outperformed those in the Rest of UK over 2018 with total returns of 20.3% and 14.5% respectively.

Robin Honeyman, Research Analyst at CBRE UK
At the All UK Property level, total returns of 6.3% for the whole of 2018 were roughly in line with IPF consensus forecasts. At the sector level, fortunes over the year were mixed. The turbulent year for the Retail sector drove negative capital and rental value falls for the year, and resulted in an annual total return of 1.8%. By contrast, the Industrial sector reported a total return of 18.1% for the year. This is the biggest difference in annual results between the best and worst performing sectors in our index’s 19-year history. There were also strong regional divergences, with offices outside Central London performing much better than those within it. Away from the main sectors, the Other sector, encompassing all the Alternative sectors, outperformed the Retail and Office sectors in 2018 with a total return of 8.4%
Robin Honeyman, Research Analyst at CBRE UK