The slowdown in capital values in commercial property has eased during the month, in a “promising sign” that the overall market is on the road to recovery.
Capital values fell by 1.1% in May, compared with a 2.1% drop in April, according to the latest CBRE monthly index. This was driven by a 3bps rise in yields, and a 0.5% reduction in rental values.
Total returns across all sectors slipped by 0.6%, compared with a decline of 1.6% in April.
CBRE said the rate of decrease in capital values eased while the pace of decline in rental values sped up, with some sectors seeing record falls.
Yield expansion continued across the board, but at a slower rate than in previous months.
Retail value declines ease
Retail suffered the largest decline in rental values on record for the sector, after falling by 1.6%. This was driven by shopping centres, where rental values fell by 2.3%.
However, declines in values across all retail categories eased in May on a monthly basis.
The retail sector posted a 1.7% fall in capital values in May, compared with a 3.6% drop in the previous month.
Shopping centre values fell by 2.8%. High street shops in the South East and retail warehousing each recorded smaller decreases, of 1.4%.
Total returns for the sector slid by 1.1%. Retail warehouses performed better than the sector average, with total returns of -0.8%. Overall, retail yields rose only 3bps in May, following a 17bps increase in April.
Offices stay resilient
Offices recorded a 0.6% decline in capital value during the month, marking a smaller decrease than the previous month (-1.2%).
Rental values remained flat at 0%. Total returns tallied -0.2%.
Outer London and M25 offices were highlighted as standout performers within the sector, after capital values in the category fell 0.5%, leading to total returns of -0.1%. Office yields rose only 2bps over the month, compared with 5bps in April.
Industrial boosts the market
CBRE noted that industrials boasted the strongest performance in real estate, for the third month running.
The agent said it was the first time since the start of the lockdown in March that a sector has posted both rental value increases and a positive total return.
Industrial capital values dipped by 0.2% over the month, while rental values moved into positive territory after inching up by 0.1%. Total returns reached 0.2%.
Industrial in the South East outperformed categories in the rest of the UK, with capital values reducing by 0.1% and rental values up 0.2%. Industrial yields rose by only 1bp in May, from 3bps in April.
What CBRE said
Toby Radcliffe, research analyst at CBRE, said: “CBRE’s May monthly index has shown signs that the immediate yield-driven reaction to the Covid-19 lockdown may be starting to abate.
“Declines in rental values are now picking up as the driver of negative performance, but overall value declines are easing.
“This is a promising sign, and as new measures to relax the lockdown are introduced throughout June there may be a hope that we are on the road towards more normal levels of market activity and performance.”
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