Rents & Yields 23rd January 2014

Soaring UK commercial real estate investment activity in Q4 2013 drove accelerating growth in prime rents and yields, according to CBRE’s latest Index. UK commercial property rents increased by 0.5% over the last quarter resulting in rental value growth of 2.7% for 2013.

The average prime yield fell by 9.2 base points over the quarter and stood at 6.0% at the end of Q4 2013. In the last quarter of the year, it was notable that yields fell or remained stable across all of the 660 UK locations monitored and in a number of places there were significant movements.

However, at 6% the weighted average remains significantly higher than the low of 4.8% recorded in Q4 2006. In Q4 2013 the office sector was again the strongest in terms of rental growth. The number of locations with rising rents increased (from 34 in Q3 to 90 in Q4 2013) and contributed to a prime rental growth of 2.0% over the quarter and 7.3% over the year.

As was seen in previous quarters, Central London offices recorded a strong performance with rental value growth of 2.3% over the last quarter. Office rental growth was mainly driven by the large improvements in rents in City, Midtown and Southbank.

However, significant rent improvements were also seen in the rest of the UK. Rental value growth in UK offices is following a distinctive geographical pattern. The South part of the UK recorded positive rental value growth, while prime rents in the North of the UK remained flat or fell over the last quarter. This has been the pattern for most of this year.

However, each quarter it is evident that the range of the growth is increasing. In the retail sector, the average rate of growth continued to be slow. High street shops recorded 0.6% rental value growth for the quarter with contributions coming not only from London but also from the South East, Midlands and North East. Prime rents for shopping centres increased across the UK, while retail warehouses recorded negative rental value growth across most regions, a trend that was evident throughout 2013. Overall, average prime yields decreased across the country.

The biggest fall was recorded in the industrial sector, with an average drop of 47 base points to 6.7% in last quarter of the year. This is the lowest yield recorded in the sector since Q4 2007. Although industrial property in all UK regions recorded a fall in yields, it is notable that the biggest falls were recorded in London (66 base points over the quarter). The office sector is also experiencing an accelerating decline in yields with the weighted average prime reaching 5.7% in Q4 2013. As in the industrial sector, all the UK regions recorded a fall in office yields.

However, in contrast with industrial sector, the biggest falls were recorded outside London, in particular the Thames Valley and Midlands. In the retail sector, yields continued to fall, but at a slower pace than in the other sectors. Although there is no single location that recorded an increase in yields, only in 30% of monitored retail locations recorded fall in yields, compared with over 80% of the office and industrial locations. A

leksandra Starczynska, analyst, CBRE Research, said: “UK Commercial real estate transaction totalled over £21bn in Q4 2013, surpassing even the levels seen in 2006-2007 according to Property Data. It is not surprising therefore that we have seen a substantial movement in values. "Investment activity is skewed towards Greater London and so too is rental growth and yield shift. However, we also have seen sharp increase in investment activity outside London and yield shift is also spreading across the UK.”