All property yields will move out to 5.99 per cent by the end of the year from 5.67 percent at the start of the year according to Colliers International, although prime stock across all asset classes will remain firm with possible marginal yield compression. Likewise, some asset classes will show greater stability. Nevertheless, the firm’s Real Estate Investment Forecasts Q3 2020 report notes that in aggregate, repricing is expected to continue this year with yields stabilising in 2021.
During the first nine months of the year, CRE investment volumes reached £29 billion, down by roughly 20 per cent from the £36 billion transacted during the same period in 2019. However, it seems that investors are returning to the market, with £4.4 billion transacted in September; the highest monthly figure since March and the start of the first nationwide lockdown. Likewise, preliminary figures for October show that £3.3 billion has already been transacted suggesting that the market may top £4 billion for a second consecutive month.
Rental growth across the board will remain in negative territory into 2021, notes Colliers as rents continue to decline across most sectors in the first half of the year following a delayed readjustment to COVID-19. A return to positive growth is expected in 2022 driven by greater economic certainty as a result of the waning of the pandemic impact and the conclusion of UK/EU trade negotiations.
Oliver Kolodseike, Deputy UK Chief Economist at Colliers International, commented: “One of the positives in today’s market is the diversity of investment demand with the ten largest deals of the third quarter being across five different sectors. The less traditional asset classes such as PRS (Private Rented Sector) and senior living remain attractive alongside industrial and top-quality office assets. So far the impact of COVID-19 has been less negative than we had anticipated in Q2 and we have revised our all property total returns forecast for 2020 from -7.1 per cent in our Q2 report to -4.6 per cent.”
The report notes that submarkets within traditional real estate sectors are becoming more mainstream. The grocery sector continues to outshine general retail. Oliver continued: “Supermarkets are particularly popular with Q1-Q3 volumes of £829 million, down only five per cent from the five-year average, and we are seeing modest yield compression taking place. Investors are looking for assets that have a strong occupational story, a strong catchment population and long-term opportunities. For that reason, industrial, city centre offices and residential continue to attract capital.”
Investment into office stock reached £7.6 billion by the end of the third quarter, down from a strong £11.3 billion for the same period last year. London accounted for two thirds of this total (£5 billion). However, there is still demand for quality product across the country, especially given keen competition for prime London assets, and pricing remains firm. Despite some outward movement of yields in the first half of the year, Colliers expects all office yields to recompress next year.
Driven by a strong occupier market and the lockdown induced boom in e-commerce, the industrial investment market has remained robust, notes Colliers. Investment between Q1-Q3 reached £4.3 billion, down from £5 billion for the same period in 2019. This is particularly impressive given that in Q2 all CRE investment failed to break through the £1 billion mark for the first time in seven years. Industrial take up for large distribution warehouses (100,000+ sq ft) topped 34m sq ft in Q1-Q3, over 30 per cent ahead of the same period in 2019.