Rental growth has returned to the UK’s commercial property sector, according to Legal & General.
At the company’s Fundamentals briefing in London today, Rob Martin, research director for Real Assets, said rental growth was the main driver of commercial property capital growth.
“Commercial property rents are rising, buoyed by stronger tenant demand and a shrinking supply of space,” he said.
“This is taking over from yield compression as the key source of capital growth.”
Commercial property prices have risen by nearly 20% since the start of last year, with market yields falling.
Martin said yields were now consistent with the level they would be at once central bank interest rates normalised.
The focus of return generation is on yield and rental growth, the fundamental drivers of property return, he said.
“There has been a progressive improvement in the volume of space being leased by companies,” he added.
“While this has not permeated the whole market equally – with the retail property sector lagging on a relative basis – there has been a significant improvement in overall demand.”
The combination of stronger demand and shrinking supply has helped to rebalance market conditions, Martin said.
Since peaking in mid-2010, the volume of available office and industrial space across the UK has fallen by 28%.
“Whilst the occupier markets are in increasingly good shape,” Martin said, “sentiment amongst a number of investors has become more measured, and the market has seen a more even balance of buyers and sellers since the start of the summer.
“We view the recent moderation in transactional activity as a positive, as it reduces the potential for momentum to propel the market into over-valuation and eventual correction.”