MSCI: industrials and retail diverge to historic levels

In the second of a three-part series in which we examine the investment performance of the UK commercial real estate sector, we look at the widening performance divergence between the sectors based on MSCI’s just published data for 2018.

Annual investment performance between the industrial and retail sectors in the UK was the widest on record at a spread of almost 17 percentage points over 2018, underscoring the dramatic shift in demand for the two property markets.

All retail annual returns slipped to -0.5% in 2018, compared to industrial’s 16.4%.

Speaking to Real Asset Insight, Will Robson, Global Head of Real Estate Solutions Research, MSCI, explains the context:

“We noticed this time last year that the big spread between performance of industrials and everything else. Last year, industrial segments were approaching on average near 20% and everything else was sub 10%. This time around, while industrial performance has eased off a bit, the spread between best and worst – industrials and retail – is the widest it has ever been.”

The diverging fortunes of the two sectors is further evident within the segments. Within the retail sector, shopping centres was the worst performing segment, slipping -5.0% in annual total returns. At the other end of the the spectrum, supermarkets performed far between, at 6.4%, followed by central London retail and south East retail, at 5.9% and 4.1%, respectively.

The three industrial segments were led by the South East region, up into strong bull market territory, at 18.5%, followed by distribution warehouses and region industrials, at 13.5% and 12.8%, respectively. The divergent paths of the two sectors is further illuminated by rental growth. According to MSCI, retail has not seen much rental growth since in the last cycle, while industrials has seen its highest ever growth over the same period.

By comparison, offices – historically the most volatile of the three core UK sectors – has shown the longest period of stability in rental growth. Offices fractionally outperformance the all-property market, returning 6.2% in 2018, with notable outperformance by the regions, which returned 8.0%. West End offices slipped to 4.6% for the year, followed by the wider South East and the City of London, at 6.5% and 6.9%, respectively.

Elsewhere, 2018 was another strong late-stage cycle year for the performance of alternative sectors. Healthcare led the pack with 10%, followed closely by leisure and hotels, both at 9.2%, with the miscellaneous property bucket delivering 7.5%. Residential, an ever-growing popular asset class among institutional investors, returned 6.2%, according to MSCI data.

james.wallace@realassetmedia.com