UK industrial yields resilient, as retail gap widens

All UK property sectors have reported increasing yields in the first quarter of the year, but the gap is widening between the more resilient industrial and office sectors and struggling retail, according to CBRE.

While average rental value growth across UK prime commercial property was 0.1% for the quarter and the average prime yield increased by 10 bps in Q1 2020, this figure masks the significant variation in performance between sectors, new data shows.

In the first three months of the year, industrial average prime yields rose by 2 bps, with rest of UK industrials (excluding Eastern and South East) increasing further at 6 bps.

Average prime yields across the office sector also increased 2 bps, with Central London offices unchanged over the quarter. In contrast to the modest increases seen by industrials and offices, prime yields for high street shops weakened considerably, increasing 45 bps taking the average yield to 6.3%. Shopping centre and retail warehouse yields moved out 53 bps and 13 bps, respectively.

Toby Radcliffe, Research Analyst at CBRE UK, said: 'Covid-19 has exacerbated the retail sector’s problems, both on the occupational and investor side; falls in rents and rises in yields have continued at an accelerated pace. Thus far, the office and particularly the industrial market is proving more robust.

However, Q1 figures only capture two weeks of the sustained lockdown period and should therefore be interpreted with caution – it may be that more significant changes occur in Q2 2020.'

Occupational breakdown
In occupational terms, industrial was the strongest sector in the first quarter of 2020, reporting prime rental growth in excess of that seen in the previous quarter. Average prime rental value growth for industrial was 1.9% in Q1 2020. In London, industrial prime rents showed solid growth at 2.3%, only slightly less than growth in Q4 2019.

In the rest of the UK, industrial prime rents increased by 2.1%, significantly more than last quarter. This was driven by activity in the East and West Midlands where prime rents increased by 4.9% and 5.8% respectively.

Prime rents also continued to rise in the office sector, albeit at a more modest rate. Offices recorded growth of 0.5% over the quarter. All Central London prime rents were unchanged in Q1 2020. In contrast, offices in the rest of the UK rose by 0.9%. Within this, key provincial cities stood out, increasing 1.9%.

However, retail's woes continue with the trend of falling prime rents across all retail sectors accelerating in Q1 2020.

Retail warehouses saw the biggest fall at -3.4%, while shopping centres fell -1.5%. High street shops fell -1.0%. East and West Midlands were hit hardest, declining -7.4% and -5.7% respectively. No region reported positive growth over the quarter.


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