The UK real estate market continued to perform strongly during the third quarter of 2014, with values rising by 3.0% for all property. This rate of growth however was slightly down on the 3.3% for the second quarter, after five successive quarters of accelerating growth. The strong level of value growth contributed to a total return of 4.4% for the quarter, the second highest since Q1 2010, according to the IPD UK Quarterly Property Index, released today by MSCI.
While the third quarter of 2014 saw capital value growth moderating slightly after its acceleration in Q2, rental value growth improved marginally across all UK property, rising from 0.7% in Q2 to 0.8% in Q3. Nevertheless, the majority of capital value growth stemmed from continued improvements in investor sentiment as yield compression added 2.7% to values over the quarter.
The 12-month return for the year to the end of September rose to 18.3% – significantly up on the return of 16.4% to end-June. The return to the end of Q3 was also the highest level recorded since 2010, reflecting the continuing market upswing across the country.
The industrial sector led the UK market during Q3 2014, returning 5.4%, the same as its Q2 performance. The office return stabilised somewhat with a return of 5.1% for the quarter, although it still registered the strongest capital performance, matching industrials value growth of 3.9%. The industrial sector’s performance advantage was as a consequence of its higher level of income return at 1.5% for the quarter.
Consistent with the trends of the current recovery, the retail sector was the weakest, with a return of 3.7% representing the biggest waning in performance since Q2 (4.3%). Nevertheless, retails still saw their second best quarter of the recent recovery, with values growing by 2.3%. Retail warehouses took over from shopping centres as the strongest retail property type, their values rising by 2.8%, while standard shops performed weakest. Retail rental growth remained sluggish for the sector as a whole at just 0.2%, even though this was its highest level since early 2008. As in the industrial sector, rising capital values resulted almost entirely from growing investor demand, as reflected by further yield compression.
Capital growth showed a mixed pattern across the UK regions in Q3 2014. London retails and industrials performed very strongly, with value growth of 6.2% for West End shops the highest for any sector-region combination. West End office growth decelerated compared to Q2, but offices on the inner London fringes and in outer London picked up. Offices in the capital continued to see by far the strongest rental value growth in the UK, reflecting buoyant occupier conditions.
Value growth moderated in nearly all parts of the UK retail market other than London, though it remained positive everywhere, despite some softening in market rents for a number of regions. The Midlands emerged as the strongest office region outside of the capital in Q3 2014, but industrial performance here fell back somewhat compared to Q2.
The overall total return from UK real estate, at 4.4% for Q3 2014, exceeded those of both bonds and equities over the period, which returned 2.9% and -0.9%, respectively (JP Morgan 7-10 year/MSCI UK).
Phil Tily, executive director and head of UK and Ireland said: “The latest IPD quarterly figures show that UK commercial real estate continues to be buoyed by strong investor demand, reflecting the country’s positive economic outlook at present compared to many other parts of the world, as well as the transparency and liquidity of the UK property market.
“The performance of London real estate across all three sectors stands out once again in Q3, with the strength of the capital’s retailing and its office occupier demand driving returns. Meanwhile many UK regions, even if looking slightly more subdued than in Q2, are still sharing in the overall picture of solid rental markets and rising values.”