International real estate advisor Savills has highlighted four key opportunities for investors seeking higher yielding assets as capital growth in the commercial property market slows down. With average returns expected to fall from 14% in 2015 to 8% this year, the firm points to small lot sizes, Scotland, high street retail outside of London and urban logistics as offering the best spread to other asset classes.
Savills analysis of deals by lot size 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 bps. The largest yield gap is for offices, which currently offer 7.37% for assets between £5-15 million compared to 5.08% for assets over £100 million.
In Scotland, the commercial markets missed out on yield hardening seen in England during the referendum campaign of 2014. As a result, all sectors there offer yields circa 70-150 bps higher than in comparable English cities. For offices in prime cities, investors can expect a 5.32% yield in Scotland compared to 4.75% in England.
Mat Oakley, head of commercial research at Savills, comments: “While slowing capital growth in the commercial property market will ultimately lead to lower total returns, there are still plenty of opportunities out there for investors willing to go higher up the risk curve. Over the year ahead, there will be an increasing focus on areas where capital values have not corrected as well as asset management, development and rental growth opportunities. Investors may also create portfolios of smaller assets to capitalise on the high yields available instead of targeting larger, single assets.”
In terms of high street retail investment, Savills reports that the recovery is no longer confined to London and the South as investor confidence in the top regional cities continues to improve. For example, a unit let to Lloyds Bank in Manchester city centre recently attracted strong interest from UK institutions and foreign buyers with the final sale price reflecting a net initial yield of 4.14%. However, for now there remains an average yield spread of over 100 bps between prime retail assets in London and the South versus other regions.
Finally, Savills highlights the investment prospects of urban industrial estates based on the continued growth of e-commerce or, alternatively, the high capital value which can be extracted by converting the land for residential use. In London, the land value premium for residential over industrial currently ranges from 54% in the North West to 42% in the South West. Across the capital, the supply of industrial land has fallen from 7.3 million sq ft in 2009 to 4.79 million sq ft in 2015.
James Gulliford, joint head of UK investment at Savills, adds: “The problem for a lot of value-add and opportunistic investors is that yield compression has largely disappeared and, looking ahead, there will be a rising dependence on income return. For offices, Northshoring and core to fringe migration in London and other big cities will help to deliver this. For retail, rental growth will be sporadic but is most likely to be seen in the experience-led malls, sensibly rented bulky goods schemes and convenience high street markets.”
