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Residential buy-to-Let

Rental costs and yields driven by confidence in UK commercial property market

Author: Gemma

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The UK’s commercial property market has been improving ever since the middle of last year, when the economy first moved into a period of growth for the first time since the recession that took hold in 2008. And now it seems that 2014 is a period of strong growth in the market, with investors now seeing their rental prices and yields improving as confidence in a number of areas of the business sector has grown throughout the year.

Savills latest report into the retail sector has shown that investors have seen yields harden in June 2014, going from 4.98 per cent to 4.84 per cent, in what the company said was the largest monthly downward shift seen at any time since 2010.

Savills said that this has been a response to the rising interest in investing in the retail sector, with most accepting that the sector is starting to really recover, and consumer confidence now reaching its highest point since 2005.

People are also investing in retail outlets again thanks to the belief that retail is “omi-channel”, wherein sales online compliment rising in-store sales, rather than damaging them.

For the rest of the year, Savills said it expects to see such confidence in retail properties continue to be a reality, with investor demand set to be focussing around shopping centres and bulky goods warehouses – the regions are also expected to drive capital growth of ten per cent this year, with Savills having upgraded its predictions, before slowing to 4.4 per cent growth per year over the next five years.

Elsewhere, a report from IPD has said that retail, office and industrial sectors are driving rising commercial rents across the UK, a trend that it expects to see continue for the rest of year.

The IPD monthly index showed that average rental growth on a three month annualised basis is now positive for office, retail and industrial while it has started to level off for retail units in the same period.

Throughout the year, IPD and Savills both expect to see this be a trend that continues, and it will be an important one for the commercial sector. This will mark the first time since the financial downturn that all three main sectors have seen positive rental growth in the same year.

Growth in the retail sector sits at an annualised three month average of 1.05 per cent at the moment, while the same measurement sits at 5.27 per cent for offices and 1.97 per cent for industrial sectors.

In the next five years, Savills has predicted that industrial rents will rise by one to two per cent per year, offices by 1.5 to five per cent and retail by 0.5 to three per cent.

It added that the main drivers of growth in rents over this period are likely to be the same in all sectors, with the lack of development outside London during the next five years meaning that there will be much fewer Grade A vacancies as a whole.

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