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UK commercial property value growth hits new high as yields continue to strengthen

The recovery in the UK real estate market made further ground during the second quarter of 2014, as values rose by an additional 3.3 per cent for all property.

This represents the highest quarterly growth rate of the current cycle, in a market that has now continued to improve for five successive quarters.
The strong level of value growth has contributed to a total return of 4.7 per cent for the quarter, the highest since Q1 2010, according to the IPD UK Quarterly Property Index.
The second quarter of 2014 saw capital value growth accelerating once again after a slight moderation in Q1. Rental values also improved in each market sector, but the rise in the capital value growth rate stemmed entirely from warming investor sentiment as yield compression added more than three per cent to values over the quarter.
The 12-month return for the year to the end of June rose to 16.4 per cent - which is significantly up on the return of 13.3 per cent to March-end. The return to the end of Q2 was also the highest level recorded since 2010, as the renewed recovery takes hold nationwide.
The office and industrial sectors led the UK market in Q2 2014, returning 5.3 per cent and 5.4 per cent respectively, although all sectors saw a higher return than in the first quarter of the year. Offices delivered the strongest level of capital value growth, with 4.1 per cent. The industrial sector’s advantage is still afforded by its higher income return of 1.5 per cent for the quarter as values grew by 3.9 per cent.
It was, however, in the retail sector that total returns moved ahead most significantly, rising from 2.6 per cent in Q1 to 4.3 per cent in Q2, with value growth more than doubling to 2.9 per cent. Shopping centres played a leading role in this acceleration with values growing by 3.7 per cent, eclipsing both standard shops and retail warehouses. As in the industrial sector however, the strengthening of retail values resulted almost entirely from growing investor demand as reflected by increased yield compression. Retail rents meanwhile remained effectively flat overall.
Capital growth accelerated across the vast majority of regions in Q2 2014, a trend that showed a remarkable degree of consistency by sector. London and the South East continued to lead in terms of the absolute level of growth, with West End retails, whose values rose by 5.8 per cent in the quarter, dominating. For London offices, the West End and Midtown continued to outperform the City, as they have done in each of the last 12 quarters.
For the industrial sector, higher levels of performance have spread rather more widely in the last quarter, to include the East and West Midlands as well as Eastern England, with value growth exceeding 4 per cent in each of these regions. Yield compression in these markets had a bigger impact than virtually any other part of the UK, for any sector.
The overall total return from UK real estate, at 4.7 per cent for Q2 2014, exceeded that of both bonds and equities over the period, which returned 0.9 per cent and 3.4 per cent, respectively (JP Morgan 7-10 year/MSCI UK).
Phil Tily, executive director and head of UK and Ireland, says: “While the latest UK GDP growth estimates for Q2 2014 indicate that GDP has at last reached its pre-recession peak, commercial real estate values are still about a quarter below their 2007 level, according to the latest IPD quarterly figures.
“However, the latest results confirm that recovery has taken hold throughout the UK property market, and that investors’ appetite for all types of commercial real estate across the country is continuing to strengthen. And as long as the economic indicators keep improving, the rental growth on which returns ultimately depend should also be bolstered.”

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