Following a strong end to 2014, the pace of capital and rental value growth across the UK decelerated significantly in January. According to the latest CBRE Monthly Index, capital values for All Property increased by 0.4% in January, lower than December’s 1.2%. Rental value growth also slowed and nationally was recorded at 0.2% in the last month. As a consequence total returns for the month were 0.9%, the lowest level since June 2013.
It is notable that growth moderated for all the main sectors in January compared with previous month’s data, a pattern that has been seen before, for example in January 2014, when capital value growth for all UK commercial property was 1.4% in December 2013 and 0.4% a month later.
Aleksandra Starczynska, Analyst, CBRE says:“After very strong growth in the last few months of 2014, it is not that surprising that the rate of growth has slowed, this pattern has been seen before at the turn of the year. With economic growth continuing and strong demand from investors growth should pick-up in the coming months, though we expect the year as a whole to be a little down on last year.”
Although rental value growth slowed in January, the strong growth that has been seen recently means that Central London office properties have become increasingly reversionary, with the gap between the initial and equivalent yield increasing. This trend has been persisting since December 2011, although the spread seemed to stabilise, with initial yield being 22-24% lower than the equivalent yield until the end of 2013. From then on the spread between initial and equivalent yields has increased again; at 3.1% the average initial yield on Central London offices is currently 151 basis points (33%) below the average equivalent yield.
Mark Penson, Executive Director, CBRE said: “Over the past few years Central London offices have become increasingly reversionary. Forthcoming rent reviews will therefore be crucial to capturing recent performance for investors especially as Q1 2010 was close to the bottom of the last cycle in terms of rental values in Central London.”