UK property returns fall to 0.3 per cent in February
Total returns for UK commercial property slowed slightly in February, to 0.3 per cent, according to the IPD UK Monthly Property Index.
Capital values, which fell by 0.2 per cent, saw their rate of decline increase, mainly due to further falls in the UK’s regional markets. Capital values have now fallen for 16 consecutive months, by a total of 4.6 per cent.
Rental values, after two months of positive, albeit slight, growth, fell in February, by 0.1 per cent.
Bonds returned 1.0 per cent in February, while equities and property equities returned 1.8 per cent and 1.3 per cent respectively (JP Morgan UK 7-10 year, MSCI UK).
The majority of regional real estate markets saw a slight tailing off in performance through February, mainly due to worsening sentiment, as stalling growth around the UK, and the likelihood of a triple-dip recession continued to impact on investor sentiment. Office markets outside the South East were the hardest hit.
Despite this, when the IPD monthly sample is broken down to its most granular regional level, which measures 38 regions and sector combinations, only nine delivered negative total returns in February, due to steady income returns.
Income returns at the headline level for UK property were 0.6 per cent for the month (an annualised rate of 6.9 per cent), while average initial yields for many regions are in excess of eight per cent. With yields for London assets as low as just 4.2 per cent (West End and Mid Town offices) there remains a strong case for investing in regional properties, providing assets are carefully selected.
The retail sector, despite the raft of administrations after Christmas, did not see any significant worsening in performance in February, though values remain in decline outside of London and there is a clear separation in performance between the best (locationally dominant centres) and the rest.
Industrial units saw some encouraging signs of improving performance in February. Capital decline eased slightly around the UK, and all industrial regions recorded positive total returns for the month. Initial yields on industrial units were above 7.5 per cent in five of the seven regions measured, and much attention has been paid to the discounted assets due the rise of internet retailing and shopping centres.
Phil Tily, managing director for the UK and Ireland, IPD, says: “There are encouraging signs in the UK property market, but sentiment is vulnerable to external shocks.
“With pricing looking keen in Central London, investors are increasingly eyeing regional assets, but transaction activity remains low due to continued nervousness about underlying occupier demand, which is reliant on regional economies being starved by austerity cuts.
“Many will be waiting for the chancellor’s Budget next week in the hope that it includes stimulus for regional growth, because until economic performance starts to improve outside of London, investors will continue to hesitate.”
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