UK commercial property growth slips further in August, but industrials forge ahead
Commercial property values in the UK rose by 0.9% in August, slightly less than the 1.1% growth seen in July. The monthly rise in values fell back below 1% for the first time since April 2014, but the recovery that began in May 2013 is still continuing, albeit at a moderating pace.
According to the IPD UK Monthly Property Index, values have now risen by 12.8% over 16 months of consecutive growth, although overall they are still nearly 30% below the peak levels of 2007.
UK commercial real estate returned 1.4% for the month, with income return standing at 0.5%. This compared unfavourably with the performance of other asset classes in August, bonds returning 2.8% and equities 2.0% (JP Morgan 7-10 yr/MSCI UK). This was the first month in which both bonds and equities have outperformed UK commercial real estate since July 2013.
Industrials opened up a clear lead among the market sectors, returning 1.8% in August, while offices were close behind with a return of 1.7%. Retails trailed on 1.1%, still lagging the other sectors as they have done continually since the start of the capital value recovery in May 2013.
Industrials delivered the strongest growth in capital values in August at 1.3%, followed by offices on 1.2%, while retail values grew by 0.6%. Through 2014 the rise in industrial values has generally been eclipsed by that of offices, but in the last two months there are signs that industrials are moving ahead, adding to the advantage already gained from their higher income return.
From a regional perspective, offices in Outer London were the strongest performing market, returning 2.4% in August. In contrast Central London shops weakened markedly to return just 0.8%, having been the stand-out location for UK retail through most of the current recovery. London was the strongest location for UK industrials, returning 2.1%.
Yield adjustment remained the principal driver of rising values across the country. In August yield compression added 0.9% to values across the UK market as a whole, with the strongest impacts for industrial values in the Inner and Outer South East, at 1.5% and 1.4% respectively.
The average UK equivalent yield of 6.7% at the end of August 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 August, albeit by a moderate 0.2% for all property. For the market as a whole, rental values have now risen continuously for 13 months.
By sector, office rental growth was yet again the highest in August at 0.3% for the month. London saw the largest rental value increases across all sectors, with the biggest rises for Inner and Outer London offices, at 0.5% and 0.6% respectively, while London industrial rental values also rose by 0.5%.
Phil Tily, executive director and head of UK and Ireland, IPD, said: “The August figures confirm that the UK commercial property market is easing back a little in terms of rates of growth, but this remains a strong market buoyed by positive investor sentiment. It will now be interesting to see whether industrials can maintain their market lead over offices, and whether retails can start to claw back some of the gap in performance that has opened up over the past year.”