UK residential assets continued to outperform commercial property in the first half of the year, though growth was predominantly driven by demand for London stock, according to IPD.

Total return for H1 was 3.1 per cent, against the 1.2 per cent delivered by commercial. Capital growth, which fell in the first six months of the year in the commercial sector, remained positive overall for residential assets, at 1.1 per cent.

The private housing market, as measured by The Nationwide House Price Index, saw values sliding by almost 1.4 per cent in H1 2012. As a result, long term capital growth in the commercial sector has surpassed private house price growth for the first time, due to low demand amongst private buyers and improved management in the commercial sector.

Strong growth in rental values continued to drive returns, as mortgage finance availability and a limited development pipeline, a result of the UK government’s construction cuts, continued to drive up demand for the private rented sector.

All residential rents have now risen by 13.6 per cent over the last two and a half years.

However, the positive growth in H1 masks a growing polarisation between London and the UK’s regions, and the divergence in values is now at its largest in over a decade, according to the IPD UK Biannual Residential Market Indicator.

Central London assets continued to grow in value, by 4.1 per cent, buoyed by a wall of international money and competition amongst new and existing UK investors for a limited supply of prime stock. However, outside of London, values declined in all regions measured for the first time since 2008, and by over four per cent outside of the South East.

Regional assets have been struggling in the low growth environment the government’s austerity cuts have caused – and show that the commercially let residential market is not immune to the effects of the UK recession.

The mid-year indicator has a considerably smaller weighting towards prime central London property than the IPD annual residential index. This means that though it does not record a large amount of the prime growth seen in London, it gives a more balanced total return in respect of the UK housing market, and the returns available to investors across the country.

Mark Weedon, head of alternative investments at IPD, says: “Most of the headlines around residential property focus on super prime central London assets, which have been experiencing phenomenal growth.

“However, it is worth taking a more balanced view of the returns offered in the sector, because many of the new investors looking at residential property, if they want to achieve returns less weighted towards capital value growth, and find a larger amounts of stock, will need to look outside of prime central London.

“Though returns in the regions are more affected by the current downswing in the UK economy, this does mean, for those investors that are interested, lower capital outlays and higher income yields – and demand remains strong, so income should remain secure in prudently selected and well managed assets.”