Institutional investors have continued to direct significant sums into retail property, despite evidence of a slow-down in consumer spending, according to property consultants, Donaldsons. Its latest research bulletin shows that net investment into the retail property sector fell just short of record levels in Q3 2005, with around £1bn committed to high street shops, shopping centres and retail warehouse.
Significantly, the research reveals that poor retail sales and increasing void rates have not yet dented retail rental value growth. Retail warehouses are securing the strongest rental growth within the sector, 4.9% per year at end-Q3 2005. High street shop rental values are experiencing modest, but nonetheless improving growth of 2.2% (versus 1.7% in Q2). Shopping centre rental growth has moved roughly in line with that of high street shops, having secured a modest uplift from 1.8% in Q2 to 2.5% in Q3.
Recent capital value performance in the retail property sector is slightly less encouraging, however. Having enjoyed the best capital growth over the past three years, retail is no longer the property type with this performance edge. Both the offices and industrials sectors are benefiting from declining yields to the extent that all three sectors' capital value gains from yield movements are now in the 10%-12% per year range.
To date, investors appear to have kept their faith in retail property mainly on the back of compressing yields, which have given a boost to shop values in particular. Indeed, with the slide in retail sales growth possibly halted, all three of the retail subsectors are enjoying better total returns now than in June. Shops and centres, the two town-centre types, now have better rates of rental, yield and total return performance than at any time this year. This was anticipated by Donaldsons and a handful of others, but is well beyond the expectation of the wider market. Interestingly, in a significant investment performance shift, town centre shops, sometimes cast as the sector's ugly ducklings, are once more outpacing retail warehouses, which have been seen as retails' swans.
Overall, Q3 2005 set a new record high for net investment by the property unit trusts and other monthly and quarterly valued funds committing just short of £2 bn. Given the complaints about stock shortage, this is a notable feature - and implies that market strength will continue across all property investment sectors for some while yet. Retail investment spending accounted for nearly half the record net spending, however this was balanced by the funds' increased commitment to offices and industrials.
Bryan Duncan, head of retail at Donaldsons, comments: "Despite a renewed enthusiasm for the offices sector, there is plenty to suggest that retail remains a safe bet. Falling retail sales alone are not a cause for concern as our research demonstrates that there is no correlation between sales growth and rental growth. If retail property continues to perform through a combination of positive yield shift and rental growth, it will retain its allure to investors."