London holding the torch 25th April 2012

Positive rental growth across all sectors in the capital saw London’s occupier markets prop up the UK real estate market as a whole in the first quarter, helping to drive marginal overall growth of 0.2% at the All Property level.

According to CBRE’s quarterly Prime Rent and Yield Monitor, shops are the most divergent sector at present, largely due to the strength of central London assets and the economic stress being felt elsewhere. Prime industrial and office markets were the strongest sectors overall in the first quarter, both reporting growth of 0.4%, buoyed by growth in some London sub-markets. Despite this positive result for prime rents, investment markets remained subdued in Q1 amidst continued uncertainty surrounding the UK economy. The headline prime yield remained at 6.1% for a fifth consecutive quarter.

According to CBRE prime rents grew 0.2% in Q1, “highlighting the stability in prime occupier markets at present”. The prime shop sector saw rents level off in Q1 after a marginal decline in Q4 2011. This was thanks to continued strength in central London, where rents grew by 2.4%. Elsewhere in retail, shopping centres and retail warehouses saw prime rental levels slip a modest 0.1% in Q1, with only a few centres slipping back during this time. Over the year, CBRE said shops saw a modest 0.5% growth in rents, largely as a result of a strong central London market, whilst retail warehouses and especially shopping centres saw rents slip as a result of weakening occupier markets, causing negative growth of 0.8% and 2.7% respectively.

The CBRE All Property average prime equivalent yield was flat at 6.1%, with only retail warehouses recording any movement at a sector level, out by 10 bps to 6%. The property/gilt yield gap decreased in Q1 to 390bps, due to gilt yields moving out by 20bps and a mild outward movement of 3bps in the prime yield.

Nick Parker, senior analyst, CBRE, said: “The message coming from these results is clear, London remains the key hub for UK commercial real estate growth. In all three major sectors, London experienced positive growth in Q1, with Central London shops the jewel in the crown of UK property. “They have seen strong rental growth amidst wider economic uncertainty, highlighting occupier affinity with key shopping locations across the West End. London is performing an important counter-balancing role and supporting prime rents, but this is shrouding the story in some regional areas where perhaps markets are not performing at the same level. “The same could be said of investor markets, with prime property in Central London being heavily focused on amid continued uncertainty for the UK economy.

However, a lot of the steam has come out of the value recovery, and prime yields have levelled-out over the past 18 months. "What remains to be seen is whether this is an inflection point, with some further downward yield shift to come, or a bottoming out of yields, with fragile sentiment giving way to a mild correction for UK property.”