UK Commercial Property growth moderates in July, but industrials stand out
Commercial property values in the UK rose by 1.1% in July, somewhat less than the 1.6% growth seen in June. This was however the second highest monthly increase of 2014 to date, indicating that the recovery in values that began in May 2013 continues to build.
According to the IPD UK Monthly Property Index, values have now risen by 11.2% over 15 months of consecutive growth, although overall they are still more than 30% below the peak levels of 2007.
UK commercial real estate returned 1.6% for the month, with income return standing at 0.5%.
This compared favourably with the performance of other asset classes in July, bonds returning 0.4% and equities 0.0% (JP Morgan 7-10 yr/MSCI UK).
As in the previous month, industrials and offices shared the leading sector position, with a return of 1.8% in July. Retails trailed on 1.4%, the sector continuing to lag the other sectors as it has done continually since the start of the capital value recovery in May 2013.
Offices delivered the strongest growth in capital values in July, at 1.3%, closely followed by industrials on 1.2%, while retail values grew by 0.9%. Through 2014 the rise in industrial values has increasingly rivalled that from offices, while industrials’ higher income return has closed the gap in overall performance still further.
From a regional perspective, offices in the Outer South-East were the strongest performing market, returning 2.7% in July, while Central London shops were close behind on 2.5%. This has been the stand-out location for UK retail throughout the current recovery. Industrial performance was broadly similar across the UK regions.
Yield adjustments remain the principal drivers of rising values across the country, although rental value growth is now well-established in all sectors. In July yield compression added 1.8% to office values in the Outer South East and to retail values in Central London, while it added 1-1.5 % to industrial values across the UK.
The average UK equivalent yield of 6.7% at the end of July compares to its recent highest position of 7.5% in May 2013, but is still well above the level of 5.4% registered at the height of the boom in February 2007.
The continuing strength of investor demand for UK property is underpinned by a solid rental market, with market rental values still rising in July, albeit by a moderate 0.2% for all property. For the market as a whole, rental values have now risen continuously for 12 months.
By sector, office rental growth was yet again the most impressive in July at 0.5% for the month, with the biggest increases for Inner South East and Outer London offices, at 1.2% and 0.9% respectively. Retail rental values were static overall, but shops in Central London saw a rise of 0.9% in July.
Phil Tily, executive director and head of UK and Ireland, IPD, said: “Although July 2014 witnessed some moderation in the monthly return on UK commercial real estate, this kind of pattern often follows a relatively strong month at the end of the previous quarter. It should be emphasised that property values are continuing to rise across all three sectors and in all regions of the country.”
The IPD UK Monthly Property Index measures ungeared total returns to directly held standing property investments from one open market valuation to the next. The index tracks performance of 3,436 property investments, with a total capital value of £39bn as at July 2014.
