Capital values in the UK property market rose by three per cent in December 2009, the strongest performance recorded in the history of the IPD Monthly Index, according to a report by Aberdeen Property Investors.

Total returns on a three month annualised basis have now reached 43 per cent.

The fastest falls in yields are for prime assets, although average property yields are now falling rapidly as well. The pace of yield decline remains weaker for poorer quality secondary and tertiary assets.

Transaction levels are now increasing sharply, albeit from a low base, having increased by 50 per cent since the low point in early 2009.

Competition for investment products has become increasingly fierce over the past six months. Overseas investors, the UK institutions, retail funds and property companies/Reits are now all trying to increase their exposure to UK property.

The retail funds have also experienced rapid inflows of cash over the past six months and are set to resume buying in earnest, after being under strong pressure to sell over the last two years.

In Q4, net investment from the UK institutions has turned positive for the first time since Q4 2006.

Overseas investors have been the biggest net purchasers of UK property, with net investment of GBP7.3bn over the past year, attracted by the fact that the UK market has been one of the fastest markets internationally to correct, and offered some of the strongest return prospects in Europe as a consequence.

The depreciation of sterling over the past year has also made UK property substantially cheaper in foreign currency terms.

On a quarterly annualised basis to December, the drop in retail rents was 4.9 per cent. This represents a slowing in the pace of decline since the record rate in July 2009 of nine per cent annualised. Although landlords continue to offer generous incentives, stronger locations are experiencing a fall in the size of inducements offered. Yields on prime and secondary shops and shopping centres have continued to fall over the last quarter.

According to Aberdeen, rental decline in the office sector has continued to slow in recent months. Office rents fell at an annualised rate of six per cent over the three months to December 2009. This represents a continued slowdown in the rate of decline, having peaked in April 2009 at 22 per cent on the same basis. The slowdown in the pace of decline has been most pronounced in central London, where prime rents are now close to stabilising at approximately GBP45 per square foot, although average rents continue to fall, albeit at a much reduced pace.

While the pace of prime office yield falls has slowed in central London in the last month or two, inward movement continues. Prime yields have fallen from their peak by 75 basis points in the City and West End, while provincial markets are now following suit with some strong inward movements. Secondary yields are now also falling.

Standard industrial rents fell by 4.1 per cent on an annualised basis over the three months to December 2009. While there has been a continued weakness in demand, combined with record levels of supply, the latest data show a stabilisation in the rate of rental decline. Development levels have fallen dramatically in the industrial sector, as with the retail and office markets, to all time lows. Aberdeen says the lack of new development has been exacerbated by empty rates legislation, as well as the absence of bank finance for speculative development. The lack of new supply coming onto the market will aid the eventual recovery of rental growth.
 
John Danes, head of UK research and investment strategy, says: "The recovery of the UK property market is gathering pace, with rental decline slowing and capital values increasing sharply. The attractions of property to long-term investors have increased, as property is viewed as a good inflation hedge, in an environment where unprecedented liquidity injections are perceived to pose a risk of inflation accelerating."