Retail is weak point in UK commercial property market

Retail is expected to have the weakest returns within the UK commercial property market over the forecast horizon as several factors make their presence felt on the High Street as well as throughout other retail formats, it is predicted.

Internet sales continue to take an increasing market share. With this slow erosion of traditional retail outlet trading, private cash buyers and institutions are interested only in prime product, according to the latest Real Estate Investment Forecast from Colliers International.

Secondary assets, especially those owned by leveraged investors are of less interest and most vulnerable to administrations and operator restructuring, it says.

Although demand for secondary and tertiary UK property assets has been very weak, given ongoing risk aversion by UK institutions and funds, there appears in the last few weeks to be a renewed interest in the best of secondary assets.

City of London offices accounted for over half of all UK office investments in the second quarter of 2011. Overseas investors continue to drive the market accounting for around 64%, or some £1.6 billion. The IPD reports that City yields compressed from 7% to 6.6% since the beginning of 2011, with prime yields reported to be around 5.25%, the report points out.

The office market in the rest of the UK has shown little sign of improvement in terms of transaction volumes by value or number of deals. Only 28 office deals completed over the second quarter of the year were outside of the Capital. Regional office investment demand has been limited to the few prime assets that have come to the market due to continuing high vacancy rates in all key markets.

Investment in the industrial and distribution warehouse sectors has been limited by lack of product. The number and value of transactions fell by 49% and 55% quarter on quarter respectively in the second quarter of 2011. Only 37 transactions were completed, totalling only £385 million, down from £858 million and 72 transactions in the first quarter of the year.

‘Uncertainty has returned to the fore, with the Eurozone mayhem and potential economic impact of a Greek default along with the British public’s ongoing struggle with deleveraging their personal balance sheets and its effect on aggregate demand,’ said Rahim Jiwani, property economist at Colliers International.

‘While the Greek worries might be bullish for UK property, weakening consumer demand can only mean further pain as the struggles of the UK retail sector would attest,’ he added.