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Commercial property rents predicted to slow with lease terms expanding

Latest research by various property consultants and experts indicate that rent levels are set to slow this year and lease terms on new deals will move out.

In the UK, the introduction of measures to restrict movement to try to slow the spread of coronavirus will cause significant disruption to activity in the short term and 2020 UK GDP forecasts have been slashed to -1.4% from +1% only a month ago. There is huge uncertainty around the duration and impact of current measures and a further worsening of the outbreak and financial stress could see GDP fall by 2.5% this year.

Research by Colliers International points to investors developers and landlords expecting that there will be little rental growth whilst lease term incentives will be moving out.

Gerald Eve notes: ‘Like all commercial property sectors, there is an expectation that industrial and logistics tenant defaults will increase through 2020 as cashflows are impacted, but this will also depend heavily on government intervention and the nature of industrial occupier activities.

“While all occupiers will experience short term impact, the scale and duration will vary greatly across industries.

“Many tenants are struggling with cost pressures and are already requesting monthly payment plans or rent payment holidays, and these are being looked at on a case-by-case basis to assess genuine need. Industrial and logistics occupiers have not benefitted from the recently announced relaxation of business rates liabilities and other tax credits, with the 12-month business rates suspension currently only for retail and leisure sectors.”

Property consultants and experts are lobbying for business rates cut across the board not just for retail and leisure.

However, once things return to ‘normal’ it is expected that rent levels and lease terms will bounce back.

Source: Logistics Manager

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Prime UK commercial property rents up 0.7% in Q2

UK prime commercial property rental values increased 0.7% in Q2 2018, according to CBRE’s latest Prime Rent and Yield Monitor. At the All Property level, prime yields were essentially flat, ticking up 1bp to 5.3%. Outperformance by the Industrial sector continues to boost results in both prime rents and yields.

Q2 2018 was the seventh consecutive quarter of Industrial outperformance, with prime rental values increasing 2.1% over the quarter, close to the 2.3% reported in Q1. Unlike previous quarters, the strongest rental growth was not in the London (2.8%), South East (2.0%), or Eastern (2.1%) markets. In Q2 2018, prime North West Industrials outpaced all other submarkets with rental values increasing 5.9%, the largest increase for the region since Q2 1990.

High Street Shop prime rents decreased -0.5% in Q2 2018, the biggest quarterly fall for the sector since Q3 2012. The biggest falls in prime rents were recorded in the South West (-2.5%) and Wales (-2.6%), though almost all regions reported falls. Prime Shopping Centres experienced a 1.0% increase in rents in Q2, while Retail Warehouse prime rents were flat.

Office prime rents increased 0.6% in Q2, up from 0.4% in Q1 2018. Central London Office prime rents decreased slightly, down -0.1% in Q2 thanks to a fall of -0.1% in the West End. For a second quarter, no markets outside Central London reported a decrease in prime rents. Rest of UK (excl. SE and Eastern) prime rents increased 1.7%, while South East and Eastern rents increased 1.1% and 0.9% respectively. Suburban London Offices also reported a 1.2% increase.

Prime yields were largely stable in Q2, moving up just 1bp to 5.3% over the quarter. Stability at the All Property level masked significant divergence at the sector level, betraying investors’ relative preference for Industrials, and lack of interest in Retail.

High Street Shops prime yields rose 16bps over the quarter to reach 5.2%. Prime Shopping Centre yields increased 15bps in Q2, while Retail Warehouses were stable.

Prime Office yields were relatively stable in Q2 falling -1bp. While Central London yields rose 1bp, Rest of UK (excl. SE and Eastern) yields ticked down -10bps in Q2, driven by movements in the North East (-31bps), Yorkshire & Humberside (-23bps) and Scotland (-18bps).

Industrial sector prime yields fell ‑11bps in Q2 2018. London reported the biggest fall in prime Industrial yields, moving in ‑25bps over the quarter. All UK Industrial prime yields have now fallen -85bps over the last 18 months.

Miles Gibson, Head of UK Research at CBRE, said: “All Property results continue to demonstrate the resilience of prime commercial property, although performance continues to be boosted by the Industrial sector. The current run of CVAs in the Retail sector is having a noticeable impact on prime rents and yields, as they have done on performance figures in our UK Monthly Index.”

Source: SHD Logistics