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UK commercial property sees strongest growth of 2013-14 recovery

Commercial property values in the UK rose by 1.6 per cent in June, a further increase on the 1.1 per cent growth seen in May, marking the highest monthly increase of 2014 to date and the strongest monthly increase since the recovery began in May 2013.

According to the IPD UK Monthly Property Index, values have now risen by 10.1 per cent over 14 months of consecutive growth, although they are still well below the peak levels of 2007.
 

 
UK commercial real estate returned 2.1 per cent for the month, with income return standing at 0.5 per cent.
 
This compared favourably with the negative performance of other asset classes in June, bonds returning -0.7 per cent and equities -1.3 per cent (JP Morgan 7-10 yr/MSCI UK).
 
Offices and industrials shared the leading sector spot, each returning 2.5 per cent in June 2014, with retails trailing on 1.6 per cent.  Although the retail return increased compared to 1.4 per cent in May, retail has lagged behind the other sectors continually since the start of the capital value recovery in May 2013.
 
Retail capital values did however see an improved level of capital growth, at 1.1 per cent in June, but this was well behind the 2.1 per cent growth delivered by offices and 1.9 per cent by industrials.
 
From a regional perspective, offices in Outer London and industrials in the Outer South-East were the strongest performing markets, each returning 3.2 per cent in June, while shops outside the South-East were weakest, returning 1.0 per cent.
 
Yield adjustments remain the principal drivers of strong returns across the country, although rental value growth also now appears to be well-established in all sectors. Yield compression added 2.4 per cent to industrial values in the Outer South East and 2.2 per cent to industrials in London in June, while it added one to two per cent for most parts of the UK office market.
 
The average UK equivalent yield of 6.8 per cent at the end of June compares to the recent peak of 7.5 per cent in May 2013, but is still well above the level of 5.4 per cent registered at the height of the boom in February 2007.
 
Strong returns are also benefitting from an increasingly healthy rental market, with market rental values rising by 0.5 per cent for all property, a level not seen since December 2006. For the market as a whole, rental values have now risen in 11 successive months.
 
By sector, office rental growth was most impressive in June at 1.1 per cent for the month, with the biggest increases for Outer London and Central London offices, at 2.0 per cent and 1.9 per cent respectively. Retail rental growth of 0.1 per cent overall also benefitted from the relative strength of London markets.
 
Phil Tily, executive director & head of UK and Ireland, IPD, says: “June 2014 was very good month for investors in UK commercial real estate, with returns matching their highest levels of the current recovery. Encouragingly, performance is being bolstered by strengthening occupier markets, while yields remain competitive with other asset classes.”
 
The IPD UK Monthly Property Index measures ungeared total returns to directly held standing property investments from one open market valuation to the next. The index tracks performance of 3,412 property investments, with a total capital value of GBP38.2 billion as at June 2014.

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