Fourth outward shift in 2018

• The average yield across all thirteen sectors is currently 4.63%. This is the fourth shift outwards of the Savills prime average yield this year with the yield returning to August 2017 levels. This remains however 41 bps lower than the long term average of 5.22%

• The shift outwards this year has been driven entirely by sentiment changes within the retail sector. Indeed all retail sub sectors bar food stores have seen yields shift outwards by 50 bps.

• Whilst yields for industrial and distribution property have continued with their downward trajectory the tightening has not been enough to alter the upward path of the Savills prime yield.

• With four of the five retail segments continuing to display upward pressure on their yields and no sectors pushing inwards we expect the Savills prime yield to continue edging outwards.

• Perhaps more noteworthy however has been the shift in the prime vs secondary yield spread which now stands at 101 bps, reflecting a shift inwards of 43 bps over the last twelve months.

• Against a long term average of 159 bps the spread is now at its lowest level since October 2008.

• With the MSCI all property equivalent yield being a lagging indicator it would be safe to assume the spread between prime and secondary will continue to close over the coming months until current investor sentiment related to retail filters through into regular valuations.

• Whilst the sentiment in the retail sector has impacted pricing it doesn't yet seem to have played out the in the same way in terms of investment volumes as year on year the retail sector is down 22% compared to 34% in the industrial sector, a trend we examine below.

What is holding back industrial investment volumes?

• Graph 2 illustrates the total investment volume for the industrial and retail sectors. 2017 represented a watershed moment with industrial accounting for more than retail for the first time on record.

• This year both sectors have declined with retail currently standing at £4.8bn to the end of Q3, compared to £6.2bn for industrial. This reflects falls of 22% and 34% respectively.

• Whilst the sentiment relating to the retail sector is well documented, and can explain the fall in investment volumes the industrial sector would appear to hampered in the most part by a stock supply issue.

• Given where total returns are currently, and indeed forecast to be, for the next five years there would appear to less sellers in the industrial market. Moreover the structure of the market has changed considerably in recent years as the market has matured.

• In previous market cycles developers in the industrial sector generally traded stock once complete, typically to UK or overseas institutions. However, many historical developer traders are now developer holders, set up as REITs keeping stock in their own funds and maximising income returns.

• For the last quarter of the year we expect this trend to be mitigated by the volume of industrial portfolios that are currently in the market, estimated to total £2.5bn of stock. Given the current amount, and depth, of investor interest we expect to see volumes rise.

• Longer term new entrants to the UK logistics market may stimulate investment volumes into 2019 and beyond. US logistics developer Panattoni have entered the UK market and are currently developing over 3m sq ft of grade A warehouse space. If the model they have deployed successfully in the USA and Europe is replicated in the UK we would expect to see this stock traded once let.

• This could have a double positive effect as to increase stock availability in the investment market, but also to provide evidence of continued rental growth in larger speculatively developed warehousing which traditionally has outperformed the build to suit element of the market.

"Cliff Edge" Brexit to stimulate overseas investors?

• With limited clarity still to emerge on what our trading position with the EU will be post March 2019 we have started to examine what could happen to investment markets in the result of a hard cliff edge Brexit.

• Our current working theory is reminiscent of the immediate aftermath of the June 2016 referendum when the value of sterling fell sharply triggering a period of investor hiatus quickly followed by an influx of overseas investors to the market. This time however with retail funds better capitalised we wonder who any "forced sellers" might be?

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