We’ve been tracking the change in investor cap ex rates to rebalance our asset allocation model. Sounds simple?! The variation over time is quite remarkable, with rates varying through the cycle. Then there is inflation to adjust for and dilapidation payments. The exercise we undertake is equivalent to adding up every asset business plan and averaging the expenditure out over the whole sample. If you have a strong view that we’re missing something please let us know.

According to MSCI, in 2021, investors in the UK spent an equivalent of 0.65% of capital value on improvements. This amount equated to £19.48 per m2 or £1.81 in ft2.  This expenditure predominantly relates to refurbishment costs to maintain the building in lettable condition.

The figure is net of dilapidation payments or reinstatement works which in future may be jeopardised by tenants arguing that they do not need to reinstate a building into a condition that would not then meet current environmental standards.

In the retail sector, the 2021 figure is down on previous values as investors have pared-back expenditure on shopping centres to a quarter of their average over the previous four decades.

In office and industrial the figure is rising. In offices, average capital expenditure in today’s prices for the decade 2011-20 breached £50 per m2, or c£5 per ft2, up from less than £38 per m2, or c£3.50 per ft2 in the previous 10 years.

As a proportion of capital value, much of this rise has been hidden by a rise in capital values.  The MSCI office sample had an average value of c£6,000 per m2 as at the end of 2021. Capital expenditure as a percentage of capital value therefore edged only slightly higher to 1.1% from 0.9%.

In the depths of the GFC the average capital value fell to £3,183 in today’s prices. In response investors pared back their capital expenditure in 2009/10 to c£32 per m2, leaving the ratio of capital expenditure to capital value similar to today’s levels at c1%.

Looking forward, the economy looks to be teetering on the cusp of another recession, so investors face the prospect of rising inflation, falling rents and rising yields on top of new environmental standards. Could the environmental legislation push up capital costs at a time when capital values are falling? This would increase the drag on returns from capital expenditure in the coming years or push capital values down further today to compensate.