15 April, 2021

CBRE’s Monthly Index tracks average investment performance and so is a useful tool to track investment performance at sector and portfolio level. However, as with all averages it may miss nuances at asset level.

Our data showed that over the last twelve months from the onset of Covid 19, property values fell -7.2%. Retail saw significant falls - shopping centres -30.9%, standard shops -12.1% and retail warehouses -13.6%. Falls in offices were -4% in central London and around -5.4% in the rest of the UK (excluding London and the South East). Industrials increased 6.2% overall.

However, looking at the distribution of capital and rental valuation change at asset level demonstrates that averages, whilst interesting, tell us little about performance at asset level, which is far more relevant to lenders, reviewing their loan collateral for example.

CBRE Research has undertaken some interesting analysis of the period from the beginning of March to the end of February 2021. 

At the sector level, the table below shows the proportion of assets seeing various levels of capital value change. This demonstrates a remarkably wide range of asset level capital value changes over the 12-month period. 

Market Performance and Asset Granularity Graph 1The average value movement in each sector is observed extremely infrequently at an asset level. This demonstrates the need to look beneath the sector averages and the importance of asset level analysis.

The left tail of the distribution – where the largest falls in value occur – not surprisingly – has proportionately more retail and few industrial observations. This shows the high and low risk nature respectively of the sectors in this downturn.

Turning to rental values, CBRE’s Monthly Index recorded an overall fall in retail rental values of -8.0 % over the last twelve months. The fall was greatest for shopping centres (-13.3%) and -7.6% for shops and -5.5% for retail warehouses. Office and industrial rental values were largely flat over the period.

A more granular analysis of ERV growth movement at asset level shows shopping centres, retail warehouses and standard shops as the sectors where more ERV change was being factored into valuations, with a very broad spread of adjustments.

Market Performance and Asset Granularity Graph 2Whilst zero change was the most common observation for asset level ERV growth over the last twelve months for shops (27%) and retail warehouses (24%), it was not the majority. For shopping centres, all assets have registered a fall in rental value.

The majority of retail assets have seen ERV decline; 70% of shops, 69% of retail warehouses and 100% of shopping centres, with the proportions seeing falls of -5% or more being 58%, 47% and 73% respectively.

In conclusion, whilst reference to indices can be helpful at a portfolio and sector level, they are based on averages, which inevitably mask asset level performance and trends. It is therefore extremely risky to attempt to plot valuation outcomes based on an indexation approach. There is no substitute for detailed asset level analysis.