Niche areas of the property market, however, not only offer attractive yields but also potential income growth. Investors in retail warehousing, student accommodation, doctors’ surgeries and self storage assets could reap the greatest income rewards thanks to rising demand, inadequate supply and government policy.
BIG SHEDS, BIG RETURNS
M&G Real Estate chief investment officer Tony Brown describes the gap between the risk-free rate and property yields as “significant”. “There are 400 basis points between the average property income yield and the 10-year government bond rate,” he adds.
Brown, however, fires a warning to investors. He says that three or four years ago investing in any type of property would have made you money. “A rising tide floats your boat, and it [property] was certainly doing that between 2013 and 2016,” he says.
But this is set to change, Brown believes, predicting that over the next three years there will be big differences in the returns generated by sections of the real estate market. Logistic warehousing near major urban areas or motorway junctions sits in the best real estate bracket thanks to the popularity of online shopping.
“The UK is a small island with a lot of people on it,” Brown says. “It is quite easy to get goods from a warehouse to someone’s front door. So retailers, third-party suppliers and companies like Amazon are taking these new logistic warehouses across the UK to get goods to people as soon as possible.”
Demand in this area of the market is high and so is income growth. Brown, who has around £2bn invested in logistic and industrial assets around the UK, is seeing rents improve by 4% to 5% a year, a level of growth that he says is higher than it has ever been. Prime retail warehouse yields finished 2016 at 5.7%, beating the 5.4% return for all property, CBRE claims. Brown is seeing yields of 5% in London’s logistics market, which move up to 6% to 6.5% in the regions.
“We are seeing those yields plus rental growth producing quite attractive returns,” he says. “If you put those together you can get close to double-digit returns from those assets, which in this environment is quite attractive.”
