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Retail remains at epicentre of downturn

A closer look at the latest data from the commercial property market.

Last updated: 05 Aug 2020 6 min read

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Commercial property returns 

  • MSCI reports that, on average, valuations declined by a further 0.7% in June, and are down by 6.2% across the first half of the year. This represents the worst half-year return since H1 2009, in the midst of the global financial crisis, when average values fell by 13%.
  • The retail sector remains at the epicentre of the downturn, having lost 12.5% so far in 2020, and 30% since the start of 2016. The shopping centre segment has suffered worst of all, down by 17% this year, and by 43% since 2016. In contrast, supermarket values are only down by 1.5% this year, and even ticked up by a marginal 0.1% in June.
  • Office values declined by an average of 3.7% in H1. There was no clear trend across regions, although London and southern England appeared to be slightly more resilient, while Scotland saw values fall by 6.6%. Value falls have been largely yield driven so far, although office park rents have softened slightly in recent months.
  • The industrial sector shows limited impact to date, with average values down by just 2.5% since the start of the year. Performance has varied across the country, with values in London down by less than 1%, while those outside the South East are off by around 4%.

Source: MSCI

Investment market activity 

  • £2.1bn of investment transactions completed in June, double the total from May, reflecting the gradual relaxation of lockdown measures. However, the retail sector remains virtually closed, with just £190m representing the lowest monthly total on record.
  • More than half of all investment into retail was targeted at supermarkets, including a £62m sale-and-leaseback of five Waitrose stores to LondonMetric. The new 20-year leases (with a break at 15) are linked to the CPIH index and represent an initial yield of 4.3%.
  • Elsewhere in the retail sector, Patrizia acquired the Newcastle Shopping Park out of the M&G Property Portfolio for £34.5m. The 10-unit park is anchored by Asda and provides an initial yield of 7.75%. The disposal takes the fund’s sales proceeds to £148m since it was suspended in December, with a further £148m under offer.
  • Segro completed the largest transaction to take place since the lockdown began, paying £202m for the Perivale Park Industrial Estate in west London. The deal was notable for the fact that the final price was reportedly unchanged from the price offered pre-pandemic. The initial yield of 3.1% reflects the strength of the London market, although this was reportedly topped up to 3.5% by the vendors.
  • Two significant regional office deals completed in June. Tristan Capital Partners acquired the Reading International Business Park for £120m, with the low initial yield of 6% reflecting almost 50% vacancy. Elsewhere, the strength of the Bristol market was highlighted by Tesco Pension Investment’s £70m forward-funding of 120,000 square feet at Finzels Reach.

Source: Property Data

Market yields

  • Knight Frank reports that market yields have been broadly stable over the last month. In the case of retail, this may simply be that there has been no evidence to rely on, but there have been signs of renewed activity elsewhere that may start to give new clarity on post-pandemic pricing.
  • Perhaps unsurprisingly, given that many leisure operators have still not yet reopened, Knight Frank considers that leisure park yields have softened further, despite having already moved out by 125 basis points (bp) since the lockdown commenced in March. The real estate consultancy estimates that the best parks would now trade at 6.5% or more, up from 5.25% at the start of the year.
  • The industrial sector continues to show the most resilience, and Knight Frank takes the view that yields for prime South East estates have hardened further, driven by strong rental growth and underwritten by high alternative use values. The consultancy does, however, consider that yields for secondary distribution assets may have softened marginally.
  • Knight Frank reports that sentiment remains negative across the retail and office sectors. Retail yields are considered to have moved out by anything from 50bp to 150bp since the start of the year. The office sector has not seen the same movement, with typically just a 25bp outward yield shift.


  • At its July auction, Allsop raised its highest sales proceeds since the start of the pandemic, achieving total sales of £51.9m. While this is around a third below the July 2019 auction, it followed closely behind an additional June auction which raised a further £29m.
  • The auction was carried out entirely online, but a wide range of sales were complete prior to the auction, including an industrial estate in Maidstone sold by a real estate investment trust for almost £2m. Assets with long income remain popular, including a bank branch and a portfolio of Kwik Fits sold at sub-5% yields, while a freehold lot in Soho sold for more than £3.5m.

Market forecasts 

  • Independent forecaster PMA has updated its forecasts, replacing the previous round which was released shortly after the start of lockdown. Unsurprisingly, given the impact of the pandemic, there has been some downward revision, but this has largely been limited to the retail sector.
  • The outlook for the retail sector has worsened further, given announcements made by retailers about job losses and permanent store closures, as well as the wider employment market backdrop. PMA now anticipates a further 12% off retail values in H2, in addition to the 12% lost in H1, and a further 10% off next year. This outcome would take the cumulative average decline to 44% between 2016 and 2021. 
  • Under its base case, PMA expects a loss of 13% in the office sector across 2020, with meaningful recovery from 2021/22. The forecaster anticipates a relatively sharp downturn in London, followed by a strong recovery, while it sees the Big Six regional cities as the most resilient overall.
  • PMA expects the industrial sector to deliver the most robust performance, with an average decline of just 5% this year, implying a decline of just 2% to 3% in the second half of the year. The fall would be driven by outward yield shift, with rents expected to see little, if any, negative impact.
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