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Twelve consecutive months of declining values in the UK, but returns remain positive

Twelve consecutive months of negative capital movement in the UK means property values, at the headline level, have fallen by a cumulative 3.5 per cent since November 2011, according to the IPD UK Monthly Property Index.

Despite the falling values, caused by uncertainty amongst investors and occupiers alike, total returns have remained positive each month, backed by an income return which has not fallen below 0.5 per cent per month.

Total return for October was 0.3 per cent, a small increase on September, as capital declines eased slightly, to -0.3 per cent. However, little has changed in the regional markets – selecting the main 22 sectors measured by IPD, all those outside of London, except supermarkets, were still seeing declining values this month.

Though the news that the UK economy emerged from recession last month was welcomed across the industry, the effects of austerity cuts and slow economic growth have continued to lead to sluggish occupier demand – with rental values falling by a further 0.1 per cent in October, their fifth consecutive month of decline.

Outside of the South East, rental values fell by up to 1.0 per cent in October alone in one of the more beleaguered parts of the market, rest of UK standard retails.

Current yield levels continue to drift out, with investors mindful of lacklustre occupier demand, and their ability to re-let at current rental levels.

Phil Tily, IPD managing director for UK and Ireland says: “Twelve months of falling capital values marks another rather unfortunate milestone for the UK property sector, but there has been some improvement in underlying performance for the last few months.

“Unfortunately, occupier demand and valuer sentiment remain extremely unsteady, and there has been little good news to boost either. For every positive report regarding the economy, another causes dismay, and this is taking its toll on yields and rental values outside of London.

“The UK’s recovery is expected to be slow and difficult, and it looks like this is set to be the case for the property market  too, but investors can, at least be thankful that though the situation could have been a lot better over the last twelve months, it could also have been a lot worse.”

In the last 12 months, property has underperformed both equities and gilts, due to its capital declines, returning 3.1 per cent, against 9.8 per cent from equities and 7.6 per cent from gilts.

However, income return alone was 6.8 per cent for last 12 months, and the low volatility of that  income offered on UK property continues to make it an attractive alternative to gilts and equities, which are still suffering from low yields and extreme volatility respectively.

Furthermore, since the downturn, the focus of UK property managers has been to stabilise and secure income streams, through effective asset management.

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