Rental growth drives commercial property returns

Photo: DuncanH1

Rental growth is now the main driver of commercial property returns, according to new research.

The analysis of the UK commercial property sector by Blue Marble Asset Management highlights rental growth as key to profits in 2016, rather than yield compression, following a period of activity in 2015, when some market leading prices were paid for commercial property investments.

"At 14 per cent, total property returns in 2015 fell short of the high of 19.7 per cent of 2014, but beat the 11.5 per cent of 2013," comments Tim Matthews, Chief Executive of Blue Marble Asset Management. "However, the key factor in the UK investment market in 2015 was rental growth for all UK property of 4 per cent, the first time this has recovered to match pre-recession levels of 4.1 per cent growth in 2007."

Growth is expected to continue at similar levels in 2016, with the office sector performing the strongest, as central London offices led rental increase with a rise of 10.3 per cent. The industrial sector was close behind, with rental appreciation across the country of 5 per cent.

"Huge prices rises for commercial property in 2014 and 2015, driven by demand exceeding supply, resulted in yield compression with one notable deal in January 2016 for the acquisition of a £20 million Birmingham city Centre office block delivering a yield of only 4.3 per cent," adds Matthews.

"However this does not mean we are in for another year of frantic activity like 2015, when in the middle of the year, the market was more reminiscent of a Black Friday sale with freehold properties snapped up at some very steamy prices.  Thankfully 2016 should see investors becoming more concerned about yields, with a greater focus on market sectors and areas where rental growth will continue."

The trend is also reported in London, with analysis by Levy Real Estate and MSCI of more than £30 billion of assets across 20 key submarkets finding that rental growth in the capital rose from 7.8 per cent in 2014 to 8.5 per cent in 2015.

"Returns are now increasingly being driven by a growth in rents and this suggests that London’s commercial property investment sector can expect further sustainable growth in values," says Levy Real Estate Investment Partner, Simon Heilpern.
 
Camden and King's Cross recorded the strongest rental growth, with values up 17 per cent, while high occupier demand and a lack of supply in other submarkets drove up rents 11.9 per cent in Mayfair.