With total returns in UK commercial property likely to be close to eight per cent this year as capital growth slows (compared with 13 per cent in 2015), many investors are starting to focus more on income than capital growth. However, while much of the market has already experienced its cyclical recovery in capital values, there are still a few areas where this may be yet to come.
With that in mind, here are our top picks for capital value growth:
Small is beautiful
We recently analysed deals by lot size and found that assets in the £5-15 million bracket delivered the highest yields across retail, offices and industrial, with a spread to other lot sizes of between 50 and 200 basis points. Offices have the largest yield gap, currently offering yields of 7.37 per cent on assets between £5-15 million – over 200 basis points more than the 5.08 per cent seen on assets over £100 million.
Take the high road
Due to the referendum at the end of 2014, Scotland’s commercial markets largely missed out on the yield hardening seen in England. Consequently, Scottish assets across all sectors offer yields between 70 and 150 basis points higher than their English counterparts. For example, offices in prime Scottish cities offer a yield of 5.32 per cent opposed to an average across English cities of 4.75 per cent.
Shop ‘til you drop (in the regions)
Consumer confidence has recovered across the UK, which has helped to boost investor confidence in the top regional cities and prompted a hardening in yields. For example, the strong interest in a unit recently let to Lloyds Bank in Manchester city centre resulted in the sale price reflecting a net initial yield of just 4.14 per cent. Nonetheless, overall, there remains an average yield spread of over 100 basis points between prime retail assets in London and the South versus other regions.
The continued growth of e-commerce is boosting the investment prospects of urban industrial estates across the UK. In and around London, however, the land value premium for residential over industrial may make it more worthwhile to convert industrial properties to residential use (and the planning system has recently changed to make this easier). The residential land premium varies across the city, from 54 per cent in the North West to 42 per cent in the South West, and as a result the supply of industrial land has fallen from 7.3 million sq ft in 2009 to 4.79 million sq ft in 2015.