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UK’s March recovery likely to be short lived: Capital Economics

All-Property Returns

Although a turnaround in returns during March in the UK property sector hinted at a brighter outlook, according to research firm Capital Economics, structural and cyclical headwinds remain and this is not the start of a sustained recovery.

“With restrictions only unwinding gradually in Q2 and lingering scarring in some sectors, there is limited further upside in the near-term, despite the more favourable economic outlook,” the firm states in its UK Commercial Property Chart Book.

Favourable economic indicators included a 0.4% month-on-month rise in GDP in February, despite lockdown restrictions, which suggested January may be the low point. And Capital Economics said labour market developments were also favourable with an unemployment rate fall from 5% in January to 4.9% in February.

However, investment activity remained weak and on a 12-month rolling basis deals were down 30% year-on-year and Central London office take-up remained subdued.

While all-property rental values grew 0.1% month-on-month in March this was mainly driven by rises in industrial rents, while retail and leisure rents fell further.

Sharpest monthly fall in equivalent yields since 2014

Nevertheless, all-property equivalent yields fell by 6bps in March, which was the sharpest monthly drop since December 2014 and helped growth in all-property capital values.

In turn, Capital Economics said annual total returns jumped from minus 0.5% in February to +2.6% in March, ending 11 months of negative returns.

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