Capital values fell by 3% across UK commercial property in March, while total returns were -2.6%, according to the latest CBRE Monthly Index.
CBRE said the fall in capital values during March was driven by a 14bp rise in yields, since rental values dipped by just 0.2%.
During Q1 this year, capital values fell by 3.3%, while rental values decreased by 0.3%. Total returns stood at -2% for the quarter.
Toby Radcliffe, research analyst at CBRE, said “At the all-property level, capital values fell by 3% in March. Monthly falls of this magnitude are extremely rare – unprecedented outside of the global financial crisis and the immediate aftermath of the Brexit vote in 2016.
“In the latter case, values fell by 3.3% in July before returning to growth by October. In 2008, on the other hand, Lehman’s collapse in mid-September presaged a 2.8% fall in values for the month, followed by falls of more than 4.5% in each of the following three months. The scale of the current Covid-19 crisis and its impact on GDP has far more in common with the GFC than with Brexit; it remains to be seen if real estate will behave similarly.”
Retail hit hardest
By sector, retail was the most susceptible to the impact of Covid-19. Yields in the sector rose by more than 22bp – more than double the 8bp increase seen in offices and 9bp growth in industrial.
Retail suffered a 5.1% decline in capital values over the month. Within the sector there was further divergence: shopping centres fell the most, by 6.7%, while high street shops in the South East fell by 3.3%.
Overall rental values in retail dropped by 0.7%. Returns for the sector totalled -4.6%, pulled down by shopping centres at -6.1%.
Office total returns go negative
The office and industrial sectors did not experience falling rental values in March. Rental value growth in offices remained positive at 0.1%.
However, the office sector reported negative total returns for the first time since August 2016, following the Brexit vote. This stood at -1.2%.
Offices posted negative capital value growth of -1.6% in March.
City offices was the most resilient sub-sector, reporting the smallest decline in capital values (-0.6%) and total returns (-0.3%).
In contrast, Outer London and M25 offices performed worse than the sector average, with capital values falling by 2.1% and total returns of -1.7%.
Industrial’s regional divergence
Capital values in industrial fell by 1.6% in March, rental values inched up by 0.1% and total returns were -1.2%.
It marks the first time since July 2016 that industrials experienced both negative capital growth and total returns.
CBRE noted a “clear” regional divergence in industrial, with the South East market reporting capital value growth of -1.0% compared with -2.5% for the rest of the UK. Similarly, total returns for the South East were -0.7%, compared with -2.1% for the rest of the UK.
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