Sector distribution 2013 to 2015
The year saw a significant increase in the percentage of retail investments sold, increasing to 68% of the total realisation, from 58% in 2014. This represents £302 million of disposals and 75% of the volume of sales.
The breakdown of these investments include £71 million of national High Street retail investments, £46 million of investments let to banks and over £29 million of convenience stores.
Improved levels of economic activity will often be mirrored by improved interest in the industrial sector, and this was evidenced by a 13% increase in the value of lots sold, despite a slightly lower volume.
Despite the lower volumes in the commercial catalogue, the office sector remained strong. Perhaps the main change was the route to market. As a result of the extension of PDR a larger number have been offered in our residential catalogue, in order to access the specialist pool of buyers in this fast evolving marketplace.
Overall there was negligible variation in volume, with 55 properties selling (raising £68m) 14 of which were sold with consent for residential conversion.
Regional distribution 2013 to 2015
The South East and London jointly accounted for 50% of the total value of sales in 2015 (£219 million), no change from 2014. The number of lots in London however eased, despite exceptional demand. Holders of Central London assets will have benefitted from the strong investment performance in the capital, but there seems to have been little appetite for profit-taking.
Volumes, in the majority of regions showed, as a percentage of the whole, signs of improvement. Purchasers have been shifting their sights away from the competitive South East, in the hunt for better returns. Regional sales accounted for £230 million of the total sales, making up 65% of the total volume.
Average lot sizes in the South East continued to improve, rising to £790,000 from a 4-year average of £680,000
Yield analysis 2006 to 2015
Looking at the range of single-let retail investments sold “under the hammer” (a sample of over 3,000 transactions totalling £1.6 billion since 2006) we categorise the assets into A-grade and B-grade investments, depending on the quality of the tenant, the length of income and the location.
We can observe the narrow fluctuation in the A-grade yields, between 5.0% and 6.5% over the whole 10 year period. The yield stability of the better quality investments, even in times of significant economic upheaval is clear. This is undeniably the result of low interest rates and Quantitative Easing. This is made even clearer when viewed against the more risky B-grade range, which has much greater volatility, and therefore a spread of 6% to 10%.
Historically, there was a link between borrowing costs and investment yields, given the ready availability of bank finance to the sector. This link was broken by the financial crisis, as purchasers were unable to borrow, and for the last 5 years the cash buyer has predominated. As the lending climate gradually improves we may see this link reinstated. Returns to savers holding cash, will continue however, to be modest, even as rates improve.
The demand for the higher yields available in the real estate sector is, in our view unlikely to soften in the mid-term.