Apart from the geographical differences, the investment market is split between prime and secondary stock, says the latest quarterly report from Royal London Asset Management (RLAM).
The former has continued to see stable yields and rents, in contrast to the latter, where yields have moved out and rents have fallen. This is partly reflected in the IPD index returns for the third quarter, which showed capital values declining by 1.1%, while total returns just remained positive, at 0.6%, the report shows.
It also shows that transactional volumes are marginally down this year but the pattern remains the same, with activity concentrated on central London where foreign investors remain the predominant buyers. The occupational market is likewise centred on Central London in all sectors.
Central London retail is still showing strength, with the highest rents being paid for premises in Oxford Street, Bond Street and South Moulton Street. Overseas retailers are the prime movers in these locations, including Victoria’s Secret who have recently opened in Bond Street.
Outside London, only the better locations like Guildford and Glasgow are holding up, whereas in the more secondary towns vacancy rates are proving stubbornly high. Supermarkets continue to remain popular with investors, particularly those on leases that have fixed rental uplifts linked to RPI. The quarter saw some shopping centre transactions, while retail warehousing is only seeing significant investor interest for the best schemes.
From the perspective of both occupation and investment, the Central London office market is still the most active. The Shard completed this quarter, bringing 560,000 square feet of office space to the market, but generally new supply is restricted. In the City, the occupational market is partly divided between financial services and the insurance industry.
Properties such as Cannon Place and the Walbrook Building in the traditional financial core are finding it difficult to secure tenants. In contrast, 122 Leadenhall Street (The Cheesegrater) and 20 Fenchurch Street (The Walkie Talkie), both in the City’s traditional insurance district, have been successful in gaining pre-lets ahead of completion. This is perhaps a reflection of the relative performances of these industries. Outside Central London, there is little development activity due to subdued occupational markets.
The industrial investment market saw little change during the quarter, with investors’ preference being for London and the South East and the more recognised distribution locations. Rents in the south of the country remain relatively stable, while the rest of the UK came under pressure due to the economic environment.
‘Looking ahead, our outlook for the property market has not changed. Until there is a marked improvement in the economy, businesses will struggle to improve profits and have the confidence to invest resources,’ said Stephen Elliott, manager of the Royal London Property Fund.
‘This has a direct impact on the occupational markets as occupiers will either not expand, or will seek to reduce their exposure to property. For those parts of the economy that are doing well, the opportunity to negotiate favourable terms for occupation will improve, although this will not apply to London where supply will still be tight,’ he explained.
‘We expect secondary values to continue to slide and as a consequence total returns for 2013 are likely to be below the income return but still positive at around 3%. This decline in value may be accelerated if property funds suffer significant levels of redemption. However, at the moment there is no evidence that this is happening,’ he added.
