UK commercial property markets have delivered the first positive annual capital growth for two and a half years, rising by 2.7 per cent, according to February’s IPD UK Monthly Index.  

Last month saw the first positive annual capital growth since September 2007, which delivered 2.2 per cent, and is the largest since the 4.8 per cent recorded the month earlier.

Annual capital depreciation rates have been easing for nine months, since reaching an IPD record high in May 2009, of -31.5 per cent.

February’s 2.7 per cent annual capital growth has been driven by the return of yield compression, with initial yields coming in by 110 bps from a cycle high of 7.9 per cent in June 2009 to 6.8 per cent, and attenuating rental pressure. 
 
Rental value growth, which measures underlying movements in estimated rental levels, has improved from an annual rate of -8.9 per cent in October 2009 to -7.1 per cent last month.

Malcolm Hunt, head of UK client services, says: “This is the first positive annual capital growth in exactly two and a half years. The combined influences of yield compression, and an improving rental environment have buoyed capital values which, together with robust income returns, have all contributed to the first positive double-digit annual total return, at 11.1 per cent, since July 2007.” 
 
Over February a 1.3 per cent monthly capital growth, together with a 60 basis points income return, helped deliver a 1.9 per cent total return. 
 
Hunt adds: “Rental pressure, although still negative, has decelerated to it lowest monthly level since August 2008, at -0.1 per cent, driven by a moderately improving economic outlook. Capital values have now risen by a compounded 11.7 per cent since the bounce back over the last seven months, while yields have compressed for eight consecutive months.”