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Phil Tily, IPD UK and Ireland managing director

UK property returns improve in the New Year

Total returns for UK commercial property rose in January to 0.4 per cent, their highest in 12 months, according to the IPD UK Monthly Property Index.

Capital values continued to fall, but their rate of decline eased to just 0.2 per cent. Alongside this, rental values saw positive, albeit slight, growth, for the second consecutive month.

Against the -1.7 per cent from bonds (JP Morgan GBI Global, UK 7-10 Year) UK property’s 0.4 per cent total return compared well, as it did against the 0.0 per cent delivered by property equities (MSCI UK). However, the 6.5 per cent return from equities (MSCI UK) was noticeably stronger.

For the first time in over a year, all standard office segments delivered a positive total return. Regional values continued to fall, but declines slowed for offices and industrial units. Conversely, capital growth slowed in the West End office and retail markets, while in the City office market values fell for the first time since July 2012.

Initial yields for Central London shops and offices have fallen to just 4.3 and 4.4 per cent respectively, which may be deterring investment from UK based funds. Yields for offices and industrial units are around eight per cent in a number of regions, which would provide an attractive income return provided stable tenants can be found.

The retail sector continued to underperform, though the impact of new administrations may take slightly longer to affect returns. Capital values fell by a further 0.3 per cent, and rents fell by 0.1 per cent.

There were, however, some pockets of improvement in January. Retail warehouses saw slowing capital declines, as did shopping centres outside of the South East. Despite this, falling rental values continue to impact on investor sentiment around the country for retail assets, declining by up to 0.7 per cent for shops in some regional markets.

Phil Tily (pictured), IPD UK and Ireland managing director, says: “While the New Year has not brought a turnaround in the property market, there are some encouraging signs starting to emerge, with pockets of improvement emerging around the UK.

“Returns are now at their highest in 12 months, and occupier demand in the office and industrial markets, outside of London, seems to be improving. With the pricing so keen for Central London assets, there may be more movement amongst investors to seek better value in the regions.

“Much, of course, depends on careful asset selection, and any regional recovery will remain localised with a focus on better quality assets, with potential for refurbishment and active management.”

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