A recovery in regional property values during the closing months of 2013 helped commercial property returns hit 4.4 per cent in the fourth quarter, according IPD.
This boosted annual UK total returns to 10.5 per cent, the highest since 2010.
Improving business and consumer sentiment in core cities such as Manchester, Birmingham, Edinburgh and Leeds coupled with the continuing strength of London and the South East, has helped capital values grow by 2.9 per cent during the last quarter and by 4.3 per cent for the year.
According to the IPD UK Quarterly Property Index, property performance outside London has been muted since the financial crisis, while London has prospered due its safe-haven status as investors moved money out of Europe under the threat of financial contagion. As a result, since December 2010, commercial real estate values have risen by 26 per cent in Central London – but have fallen by four per cent in the rest of the UK.
In contrast, the UK’s strong commercial property return in 2013 was more broadly-based. The steadily improving economic situation, underlined by GDP estimates from the ONS this week which showed the economy grew by 1.9 per cent last year, included a strong regional component. This resurgence has contributed to growing investor confidence in real estate outside London – which accounts for 63.6 per cent of the GBP11.6bn UK commercial property market measured by IPD.
Capital values for the UK excluding London rose by 2.2 per cent in Q4, not far below the national average, with the biggest winners, Aberdeen, Brighton and Cambridge, all seeing property values rise by more than 3.5 per cent during the fourth quarter, and total returns in excess of 5.0 per cent.
Rising regional returns will be welcomed by investors, who have been looking beyond the capital in their quest to benefit from the higher income returns available elsewhere as prime yields have fallen.
The discounting of UK regional assets has made them very competitive, with values on average 21 per cent lower than their 2007, pre-recession peak, and income yields in excess of 6.4 per cent in many areas, over a third higher than the Central London average.
This improving picture was reinforced by rental growth - at 0.5 per cent across all sectors during the fourth quarter, and 0.2 per cent for assets outside London - their first quarterly increase since September 2008.
At the sector level, offices produced the strongest total return of 5.8 per cent, principally driven by investor demand, while occupier markets also began to recover towards the end of the year – both in and out of London. Capital values rose by 4.4 per cent in Q4, supported by rental value growth of 1.3 per cent.
Industrial units around the UK also saw a strong surge in performance towards the end of the year, with values rising by 3.9 per cent and rents by 0.6 per cent, leading to a total return of 5.6 per cent.
Performance in the retail sector was more subdued, with occupier demand, particularly outside London, more fragile.
Retail returns in the fourth quarter averaged 3.3 per cent for the sector as a whole – trailing those for office and industrial markets. Property values still however rose for the sector in Q4, by 1.9 per cent, with almost all regions and types of retail seeing capital growth, again buoyed by increasing investor demand.
Improving real estate returns came second to those for equities in 2013, which returned 18.5 per cent, but outpaced bonds, at -5.2 per cent for the year (MSCI UK/ JP Morgan 7-10 yr).
Phil Tily, IPD executive director & head of UK and Ireland, says: “The growing divide between London and the rest of the UK has been one of the defining features of the recent property cycle, with the flood of investors chasing safe haven assets given concerns about stability and security of income.
“The improved economic outlook is having a more widespread impact on the latest performance results. Though London returns remained highest overall in 2013, the heavy discounting of regional assets and their high income returns are providing the potential for value add plays, feeding through into stronger regional returns over recent months.”