UK real estate ended 2013 on a high with an eighth consecutive month of capital growth in December, according to Aviva Investors.
The IPD UK Monthly Property Index returned 10.9 per cent year-on-year in December, producing a double-digit gain for the first time in three years.
In a sign of a turnaround in the market, UK institutions are now net-buyers of real estate and retail investors are increasing their real estate exposure. At the same time, there was a big rise in demand for real estate debt over the last quarter of 2013, according to a report from the Bank of England.
Chris Urwin, global research manager, real estate, says: “We have upgraded our near-term forecasts as a consequence of stronger-than-expected market momentum, and in expectation of further improvements in the economic environment, investor confidence and lending conditions. We now expect the IPD All-Property Index to deliver double-digit returns this year and next.
“The majority of UK real-estate sectors remain attractively priced relative to other income-producing asset classes. But the recent increase in government bond yields poses a risk to the relative attractiveness of central London markets, parts of which recently saw yields fall to record lows. By contrast, we believe higher-yielding sectors could outperform throughout our five-year forecast period. While secondary assets and regional offices have most appeal, market sentiment and pricing is moving quickly so we believe acting rapidly is important.
“Retail occupier markets are still generally difficult with rents continuing to decline in most parts of the market. However, conditions in Central London are very buoyant and rents continue to advance.
“In 2013, the Central London office market saw above trend take up and declining availability. More new space will be completed this year but this increase in supply is set to coincide with strengthening demand. Occupier sentiment is improving with signs of pickup in the banking and finance sectors in the City. The major regional markets are also showing increased signs of life.
“The UK industrial sector staged a recovery during 2013 to bring an end to two years of declining output. Furthermore, most indicators point to further growth in the period ahead. Availability of existing space has continued to move lower in recent quarters and rental trends in the sector have turned more positive, with modest rental growth resuming across most regions during the second half of 2013. Although further growth is expected, the pace of growth is likely to remain subdued.”