Commercial property returns rose to 1.5 per cent in November, their highest monthly return since March 2010, according to the IPD UK Monthly Property Index.
Capital growth drove the improving returns, with the values of commercially held shops, offices and industrial units rising by 0.9 per cent for the month overall, which is the highest monthly increase in property values in over three years. Income returns remained steady at 0.5 per cent.
Comparatively, returns were -0.9 per cent for equities and -0.8 per cent for bonds over the same period (MSCI UK, JP Morgan 7-10 year).
Commercial property values have now risen for seven consecutive months, by a cumulative 2.9 per cent.
Real estate returns have improved markedly across 2013 in line with improving economic confidence and growth. In the 11 months of the year so far, commercial property has delivered a cumulative total return of 8.6 per cent, considerably higher than the 2.3 per cent delivered across the entirety of 2012.
Rising property values has been the main driver of these improved returns, a result of steadily improving investor sentiment and growing occupier demand. Capital values fell by 4.3 per cent in 2012, but have increased by 2.3 per cent so far across 2013.
From mid-2013, commercial property values started to improve in many regional property markets, at first mainly in the South East, but spreading across the rest of the country after Q3. Almost all regional markets measured by IPD are now seeing growing property values. Although performance in Central London has been relatively steady for the last two years, it has been these regional improvements that have underpinned the growing headline level property returns.
However, the growth is far from uniform, and the performance of retail assets continues to lag those of offices and industrial units. Offices returned 1.9 per cent in November, and industrial units 2.2 per cent, driven by capital growth of 1.4 per cent and 1.6 per cent respectively. Comparatively, retail units delivered just 1.0 per cent, and saw an increase in values of only 0.4 per cent
Retail returns have slowly improved over 2013, with headline level capital growth again emerging in August, but still difficult trading conditions in the sector have led to lacklustre occupier demand and as a result more cautious investor sentiment around the value of assets.
While rents rose for offices and industrial units by 0.4 per cent and 0.2 per cent, they continued to decline for retails by 0.1 per cent. Only shops in central London and retail warehouses saw rental growth in November, with regional high street shops and shopping centres suffering declines.
Phil Tily, executive director and head of UK and Ireland, IPD, says: “2013 has seen a real turnaround in the performance of commercial real estate, with growth slowly creeping further afield from London during the second half of the year, alongside rising economic confidence, and this has driven the rising returns.
“While the office and industrial sectors have benefitted from growth in the economy and subsequent business expansion and confidence, ongoing shocks to the retail sector are continuing to impact on occupier demand, sentiment, and as a result, returns.”