The rate of growth in UK commercial property rents continued in Q1, increasing by 1.1% and 3.0% over the last twelve months according to the CBRE UK Prime Rents and Yields Index. The rate at which the average prime yield is falling also accelerated with a fall of 10 basis points over the quarter to stand at 5.9% at the end of Q1 2014. Falling yields and rising rents resulted in a large uplift in capital values across all sectors. Capital values for All Property increased by 2.9% over the quarter, with 9.7% capital value growth over the last twelve months.
This is the second consecutive quarter, where none of the yields recorded increases across any of the three main sectors. There have also been some significant improvements on the rental side, with a growing number of locations recording either stable or increasing rents.
The Office sector recorded the strongest results again, as has been the case for the last seven quarters. All Offices recorded rental value growth of 2.6% over the quarter and 8.5% for the last twelve months. Within the sector, Central London continues to show the highest rate of growth, byincreasing by 3.3% over the quarter. The largest improvements seen in London were in Midtown, Southbank and Fringe London. Offices in the Rest of UK (excl. London, South East and Eastern) recorded small rental value growth of 0.2%. However, this represents a turnaround from the falls in rent recorded up to the middle of 2013.
The average prime yield for the office sector remained at 5.7% in Q1 2014, but with a distinct geographical trend. The last two quarters of 2013 witnessed an accelerating decline in yields spreading across the country. In Q1 2014 yields in Central London remained flat and all regions outside Central London recorded a fall in yields. Eastern and M25 North in particular outperformed the other regions.
As a result the Office sector recorded the strongest capital value growth (3.4%) in the last quarter.
Unlike the office sector, the average rate of rental value growth for Retails continued to be slow in Q1. High street shops recorded rental value growth of 0.1% over the quarter, with Central London and North West being main contributors. Prime rents for In-Town shopping centres performed very well and therefore overall shopping centres reported rental value growth in this sector, 0.6% over the quarter. Retail warehouses recorded falling rents following the trend already seen in the last quarter.
While prime rents remained stable over the past quarter, yields moved down in each retail segment. High street shops recorded average prime yield at 5.5% in Q1, down by 13 basis points. This is the first quarter since four years ago, where high street shop yields declined for all regions. Prime yields for retail warehouses fell by around 25 basis points to 5.6% in Q1, the second quarter of such a strong decline. Although shopping centres recorded the highest rental value growth in the sector, yields remained flat at 5.6% in Q1.
As a result of positive growth recorded in almost all regions, overall capital values for high street shops increased, growing by 2.8% in the last quarter. Shops in East Midlands and Suburban London were the strongest in terms of capital value growth, while North East and Wales were the only two regions that recorded falling capital values.
Rental value growth in the industrial sector continued to accelerate, reaching 0.6% over the quarter and 1.0% over the last twelve months. At the regional level, West Midlands and North West outperformed again last quarter.
While rents are moving up, yields for industrial sector continued to decrease in first quarter of the year. Almost 80% of the monitored locations recorded falling yields and contributed to the overall average prime yield of 6.6% at the end of last quarter. The largest fall was reported in Scotland (59 basis points) and North West (45 basis points). Slowly increasing rents and fast declining yields for Industrials resulted in strong capital value growth of 3.3% over the quarter and 16.5% for the last twelve months, which was mainly driven by regions in the North of the UK.
Aleksandra Starczynska, Analyst, CBRE Research said: “The improving economic picture in the UK is being directly reflected in the performance of the commercial real estate. Yields are now falling across the entire country and rental value growth is becoming more and more widespread.”