Retail rentals settoimprove
Jan 22 2008 by Sue Scott, Evening Gazette
THE summer of 2007 marked a turning point in retail property performance, as town centre shopping lost its status as one of the highest yielding property types.
The research from global property adviser, DTZ, based on IPD figures, suggests that town centre retailing may be at its cheapest for a quarter of a century relative to other property, potentially presenting investors with opportunities flowing from asset mis-pricing.
Since detailed commercial property data became available in 1980, the retail sector has enjoyed a yield premium, reflecting the fact that the sector had far better rental value growth than offices or industrial, and, in the case of shops, the least physical obsolescence and readily accessible lot sizes.
Over the long-term, retail property has averaged rental growth at approximately twice the rate of offices, an advantage of over 2% per year.
Summer 2007 saw the turn of this historic trend and income returns available on shops and centres matched those for all property at 4.6% for the first time since 1980.
The average shop equivalent yield premium over that of all property has halved in the last two years, to 30 basis points.
The erosion of retail yield premiums means capital values for in-town retail assets have fallen substantially, relative to other stock.
Third quarter figures show retail rental growth at just 1.6% compared to 10.8% per year for offices.
However, DTZ are forecasting that retail will recover its historic lead over offices in the medium term. “We predict retail property will be back on top in less than three years,” says James Metcalfe, retail investment associate director at DTZ Newcastle.
“Much could depend on interest rate policy, and business and consumer reaction to the effective real cost of debt.
“Currently, though, the outlook is good – interest rate hikes have not yet significantly dented retail spending, and retailer demand for prime space on our high streets remains strong.”
James continues: “If rental growth recovers, to even half its previous superiority, then the retail sector could prove within two or three years to have been undervalued and oversold.
“For investors, this means there could be longer term opportunities on offer from asset mis-pricing, and in the meantime, careful asset management will be essential to generating income.”
