Investment volumes over the course of Q1-17 appear to be ahead of 2016. Trade buyers remain active and there is renewed focus on long income. We analyse the corporate elderly care landscape that has changed markedly in a little over two years. We interview Jeremy Richardson, CEO at Four Seasons Health Care’s brighterkind brand, to find out how product differentiation, investment and systems development are shaping strategy for care homes now and in the future. We analyse the brigtherkind portfolio usingCBRE bespoke Analytics Software Pulse.
Industrials performance pulls UK commercial property capital values up 1.3% in Q1 Strong performance in the Industrial sector boosted All Property capital value growth to 0.7% in March 2017. All Property capital values rose by 1.3% over Q1 2017, with Industrials increasing 3.2%. March’s Monthly Index shows commercial property’s steady start to 2017 apparently accelerating, with not a single minus sign in either our monthly or Q1 results.
Take-up in February 2017 was 1.0 m sq ft, a rise of 92% on January; this was in line with the 10-year average. The largest transaction of the month saw Freshfields acquire 255,800 sq ft at 100 Bishopsgate, EC2. Availability rose by 4% to 14.7m sq ft, in line with the 10-year average. The level of under offers fell by 8% over the course of the month to stand at 2.1m sq ft.
Prime UK commercial property rents increase 0.4% in Q4, 3.7% in 2016 Rental values in UK prime commercial property increased by 0.4% in Q4 2016, bringing annual growth to 3.7% for 2016. Prime yields remained relatively flat, falling by -1bp to 5.4% in Q4. Overall, prime yields increased by 11bps over 2016 for All Property.
Competition for prime lending sees margins tighten a little in first quarter For Q1 2017 originations, Senior CRE lending returns are forecast to be 3.3%pa on a gross basis and 2.9%pa on a risk-adjusted basis. This represents a decrease of 10-20bps on Q4 returns. While flat over the second half of 2016, we estimate that senior margins fell slightly in Q1 2017. A fall of around 15bps on margins on prime lending, coupled with static margins for secondary lending, combined to produce an overall decline in all property margins of 9bps. 5yr swap rates were essentially flat over the first quarter, ending 1bp lower than at the end of 2016. A weakening in the forecast for capital growth resulted in a modest rise in Probability of Default and Expected Loss over Q1. The key measure for banks, Return on RWA (calculated here as a function of margin and fee alone), was also lower. On an RoRWA basis, gross returns were 3.3%pa and risk-adjusted returns 2.5%pa, assuming Strong slotting treatment. Senior CRE lending offers an extremely healthy premium of 2.5%pa to the risk-free rate, on a risk adjusted basis. Against corporate debt, the relative return offered by senior CRE debt remaining very strong, at 1.7%. The latest Bank of England Stress Test scenario, released at the end of March, is very similar in scale of capital value shock to that envisaged a year ago. Lending undertaken at modest LTVs (50% and below) is likely to see only low single-digit Probability of Default; however for less risk-averse senior and stretch-senior lending default risk will risk exponentially with LTV.