Research article

Investment Market Overview

The investment performance of retail warehousing as an asset class has weakened over the last six months.

The investment performance of the retail warehouse sector has weakened over the last six months, both on an absolute basis and compared to other retail segments.

The annualised total return has fallen from 15% in December 2014, to 9.4% in August 2015. This is primarily due to a sharp slowing in the rate of capital value growth that the sector has been delivering, though rental growth has remained slightly positive at 0.5%pa for the 12 months to the end of August 2015. Our regular monitor of prime yields (Figure 2), shows that retail warehousing is one of the few sectors of the UK commercial marketplace that has seen rising yields in 2015, with a 25bps rise this year.

Figure 2

FIGURE 2Retail warehouse yields

Source: Savills Research

However, investor demand remains strong with institutional investors heavily biased towards the best schemes in the best locations.

Once again there have been and will continue to be very few high calibre schemes on the market, as these tend to be owned by the same handful of institutions that are currently trying to increase their holdings of retail warehousing. This has forced the institutional demand to stretch their buying criteria further down the qualitative spectrum.

As the level of demand has eased, it is apparent that the funds are not prepared to stretch this too far. This has led to the emergence of a "two-tier" market with strong demand for the very good assets and softening yields for poorer assets where investor demand is weaker.

Looking ahead we expect to see more opportunistic money entering the market in the final quarter of 2015 and into 2016. These investors are likely to be attracted by the higher yields on offer, as well as focusing on the secondary but still successful parks and schemes.

This could well be a very canny time to enter that segment of the market, as we believe that the recent softening in yields is only a temporary blip, and that the fundamentals of the sector will deliver good rental growth over the next five years. This will drive an improved return, with our five year forecast for retail warehousing returns remaining stronger than most other parts of the retail sector.

Figure 3

FIGURE 3Components of total returns

Source: Investment Property Databank

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