South East offices hit the ‘Sweet Spot’ in terms of Rental Growth and Yield Shift

According to the latest CBRE UK Prime Rents and Yields Index, rental values for all UK commercial property continued to increase in Q2 2014, albeit at a slightly slower rate than in the previous quarter. Yield shift also contributed to capital value growth, with the average prime yield falling by a further 17 basis points over the quarter to stand at 5.7% at the end of Q2 2014. Capital values at the ‘All Property’ level increased by 3.8% over the quarter, with 6.8% capital value growth over the year to date.

The office sector is presenting an interesting pattern of performance. The Central London market is showing strong rental growth, with rental values increasing by an average of 1.6% over the last quarter and 9.7% over the last twelve months. However, yields have stabilized at an average of 4.6%, and showed very little movement in Q2.

In contrast markets in the rest of the South East and Eastern regions are generally performing well
in terms of both rental value growth and yield shift. Rental value growth has been accelerating in recent quarters, particularly in the Thames Valley region, although it remains below that being achieved in Central London. However, office markets across the South East and Eastern regions showed significant decline in yields. This combination of rental value growth and yield shift means that this part of the UK is currently showing the strongest capital value growth for the office sector. Rental value growth and falling yields are evident in the rest of the UK, but so far not to the same extent.

Mark Routledge, Head of National Office Investment, CBRE commented: “The last year or so has seen performance that started in the Central London markets steadily spread outwards to the rest of the UK. Offices in the South East are currently in the ‘sweet spot’ where rental growth is accelerating and yields have room to decline further as they are still 100 to 150 bps above their previous low.

“A year ago in the markets outside Central London, only the key provincial cities and more significant towns in the Thames Valley and M25 were seeing sharp falls in yields. That is now true across the South East and Eastern regions. Over the next twelve months I expect the yield shift in the rest of the UK to accelerate too.”

The other significant trend that is shown by CBRE Prime Rent and Yield Index survey is the contrasting yield movement in the segments of the retail sector.

Yields for both Shopping Centres and Retail Warehouses fell sharply in Q2 2014 – by an average of 35 bps to 5.27% for shopping centres and by 25 bps to 5.30% for retail warehouses. In contrast the fall in the average prime yield for high street retail units was generally much smaller. The continued strong performance of Central London shops pulled up the national average, but if this is excluded the average prime yield for high street shops fell by only around 4 bps over the quarter.

Rhodri Davies, Head of Shopping Centre Investment, commenting on the Q2 figures said: “The Bluewater shopping centre transaction in June received a lot of attention and rightly so as it has set a new benchmark for the UK’s best shopping centres. However, there have been a number of other shopping centre and retail warehouse transactions in the last few months that demonstrate the strength of investor demand across a variety of locations and asset qualities.”