UK commercial property returns at 2.2% for 2019

Industrials narrowly beats offices to be best performing sector of the year

UK commercial property capital values decreased -0.4% in December 2019, according to the latest CBRE Monthly Index, while rental values fell by -0.1%. Total returns were 0.0% over the month, making total returns for the year 2.2%, composed of income returns of 5.5% and capital growth of -3.2%.

In December, capital value growth for the Industrial sector was 0.2%. Over Q4 2019, capital values increased 0.5% taking the annual figure to 2.5% and securing Industrials’ position as the strongest performing sector of 2019. However, 2019 has seen a significant deceleration of the sector’s growth when compared with 2018, when values rose 12.4%. Rental values increased 0.3% over the month and total returns were 0.6%. Total returns were 7.6% for the year.

Capital values in the Office sector increased 0.1% in December. Central London slightly outperformed the sector average with capital value growth of 0.2%, despite being pulled down by City offices (-0.2%). All Office Rental values increased 0.3% over the month, total returns were 0.5%. Offices finished the year with reasonably strong total returns of 6.9%; capital growth was 2.0% thanks to rental value growth of 2.2%. Rest of UK offices were the top performing submarket in 2019; total returns of 8.6% out-performed all other markets, including the nearest challenger South East industrials at 8.5%.

Capital values in the Retail sector mirrored the performance seen throughout 2019. Capital values fell -1.6% in December, while rental values declined by -0.7%. Total returns were -1.0%. Overall sector performance was pulled down by capital value falls for Shopping Centres which again dragged the sector down, with a fall in values of -3.1% the worst monthly performance since April 2009. By contrast, High Street Shops in the South East saw values inch up by 0.3%. Q4 was Retail’s weakest quarter of the year with capital values falling -3.9% overall taking the 2019 figure to -12.0%. Rental values fell -4.5% over the year. Again, Shopping Centres performed worst with capital values and rental values decreasing -17.7% and -7.6% respectively in 2019. All Retail total returns were -6.2% for the year, the lowest reported figure since 2008.

At the All UK Property level, total returns were 2.2% in 2019. This is the lowest total return reported by the CBRE Monthly Index since 2012 but this is in line with what the market expected at the start of the year when the IPF consensus forecast was 1.8%. The year has been characterised by a decline in Retail capital values. While no subsector has escaped these difficulties, Shopping Centres have fared particularly poorly. In contrast, Industrials and Offices have performed robustly throughout the year with Industrials finally emerging on top as the year’s best performing sector, and Rest of UK Offices as the best subsector. Investors expect a wide divergence in performance to persist into 2020, meaning macro and asset level allocation decisions will be crucial in determining portfolio performance.
Toby Radcliffe, Research Analyst, CBRE