04 November 2015

In today's Fundamentals briefing, Rob Martin (above), Research Director for Real Assets at Legal & General Investment Management (LGIM), looked at how a reduction in yields is being superseded by rental growth as the main driver of commercial property capital growth.

Commercial property prices have risen nearly 20% since the start of 2014 and market yields have fallen. According to LGIM, yields are now consistent with the level they would see them at once central bank interest rates have normalised and without the expectation of above average rental growth. This puts the focus of return generation on yield and rental growth, the fundamental drivers of property return.

Rob Martin, Research Director for Real Assets at LGIM, said: 'Commercial property rents are rising, buoyed by stronger tenant demand and a shrinking supply of space. This is taking over from yield compression as the key source of capital growth.

'Recently, there has been a progressive improvement in the volume of space being leased by companies. 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. 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, 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 overvaluation and eventual correction.'

ENDS.

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Notes to editors LEGAL & GENERAL INVESTMENT MANAGEMENT:

Legal & General Investment Management is one of Europe's largest asset managers and a major global investor, with total assets of £726billion*. We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.

Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.

*as at 30 June 2015, including derivative positions and advisory assets.

The full November PDF of the Fundamentals brochure is available here (PDF: 987KB).

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