Industrials performance pulls UK commercial property capital values up 1.3% in Q1 Strong performance in the Industrial sector boosted All Property capital value growth to 0.7% in March 2017. All Property capital values rose by 1.3% over Q1 2017, with Industrials increasing 3.2%. March’s Monthly Index shows commercial property’s steady start to 2017 apparently accelerating, with not a single minus sign in either our monthly or Q1 results.
Competition for prime lending sees margins tighten a little in first quarter For Q1 2017 originations, Senior CRE lending returns are forecast to be 3.3%pa on a gross basis and 2.9%pa on a risk-adjusted basis. This represents a decrease of 10-20bps on Q4 returns. While flat over the second half of 2016, we estimate that senior margins fell slightly in Q1 2017. A fall of around 15bps on margins on prime lending, coupled with static margins for secondary lending, combined to produce an overall decline in all property margins of 9bps. 5yr swap rates were essentially flat over the first quarter, ending 1bp lower than at the end of 2016. A weakening in the forecast for capital growth resulted in a modest rise in Probability of Default and Expected Loss over Q1. The key measure for banks, Return on RWA (calculated here as a function of margin and fee alone), was also lower. On an RoRWA basis, gross returns were 3.3%pa and risk-adjusted returns 2.5%pa, assuming Strong slotting treatment. Senior CRE lending offers an extremely healthy premium of 2.5%pa to the risk-free rate, on a risk adjusted basis. Against corporate debt, the relative return offered by senior CRE debt remaining very strong, at 1.7%. The latest Bank of England Stress Test scenario, released at the end of March, is very similar in scale of capital value shock to that envisaged a year ago. Lending undertaken at modest LTVs (50% and below) is likely to see only low single-digit Probability of Default; however for less risk-averse senior and stretch-senior lending default risk will risk exponentially with LTV.
Take-up in February 2017 was 1.0 m sq ft, a rise of 92% on January; this was in line with the 10-year average. The largest transaction of the month saw Freshfields acquire 255,800 sq ft at 100 Bishopsgate, EC2. Availability rose by 4% to 14.7m sq ft, in line with the 10-year average. The level of under offers fell by 8% over the course of the month to stand at 2.1m sq ft.
Prime UK commercial property rents increase 0.4% in Q4, 3.7% in 2016 Rental values in UK prime commercial property increased by 0.4% in Q4 2016, bringing annual growth to 3.7% for 2016. Prime yields remained relatively flat, falling by -1bp to 5.4% in Q4. Overall, prime yields increased by 11bps over 2016 for All Property.
2016 was a record year for logistics take-up, with 29.35 million sq ft of space acquired for occupation, around 10 million sq ft ahead of the previous long-run average Online retailers have been particularly active during the past year, accounting for almost 30% of take-up. Nevertheless, despite the dominance of this sector, take-up would have still been ahead of its long run average with the space acquired by other occupiers We also saw out-performance in the investment market with a total of £2.75 billion invested into single asset logistics units, a return to the investment volumes last seen two years ago Logistics assets also outperformed all other forms of commercial real estate during 2016. According to the CBRE UK Logistics Index, modern logistics properties experienced a total return of 8.6%