Property performance polarised in 2018
As with the political landscape, the investment performance of UK property has become increasingly polarised over the last few years, as industrial has out-performed retail by a considerable margin.
Traditionally, the UK commercial real estate market is thought of as comprising three sectors – retail, office and industrial. In 2018, the gap between the total return of the top performing of those sectors (industrial) and the bottom performing (retail) was 19.9%. Industrial returns of 18.1% dwarfed those of retail returns, which were slightly negative at -1.8%. (For the record, office total returns were a healthy 7.9%).
Such a significant difference is unusual – indeed it is almost the largest on record. Figure 1 shows the difference between the top and bottom performing sectors over the last 48 years, according to the CBRE Monthly Index (for the most recent 19 years) and the MSCI Annual Index (for the preceding 29 years). Over the last 48 years:
- The difference between the top and bottom performing sectors has averaged 7.7%, meaning 2018’s gap (of 19.9%) is almost treble the long-term average.
- 17 years (a third of the sample) have seen a difference in top to bottom performer of under 5%.
- The largest gap on record is 19.9% in 1991 (beating 2018 by 0.04%).
- 2017’s difference in top to bottom performer total return (of 12.4%) was (until 2018) the largest since 1999.
- Using a five year rolling average measure, this data shows that UK sector performance is becoming as polarised as it has ever been.
That 2018’s difference between the top and bottom performing sectors is exceeded only by 1991 is interesting, and some parallels may be drawn. In 1991 the out-performer was again the industrial sector, with the under-performer being not retail but the office sector. Offices, particularly the London market, were caught in the grip of a classic end of cycle double whammy of falling occupier demand at a time of rising speculative completion – causing rents to tumble and yields to soar. While today the retail sector is not suffering from additional physical supply, there is no doubt that virtual supply is on the rise given the greater share of shopping done online. Meanwhile occupier demand is suffering as consumer spending has been depressed following years of stagnant or falling real wage growth.
Perhaps the key difference between the early 1990s and now is that, while a prolonged period of extremely small differences in sector performance followed the 1991 peak (from 1993 to 1999 the average difference was just 2.7% and the maximum 4.2%), consensus forecasts project significant sectoral differences to persist, at levels closer to the historic average, for several years to come. This may be the case, but it may also indicate that the retail sector has been over-sold.
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