A dearth of UK commercial property could see bricks and mortar rack up another double-digit year in 2015, making it three years on the trot, Morningstar OBSR claims.
British property has had a golden run since January 2013, with the IPD UK All Properties index making 17.5 per cent last year and 10.9 per cent the year before.
In 2012 it returned just 2.4 per cent.
Morningstar OBSR investment strategist Andy Brunner believes the wind remains in the asset class’s sails this year.
“The fundamentals for UK commercial property suggest returns from the asset class could exceed 10 per cent for a third consecutive year in 2015.
“Commercial property offers a very high starting yield, the prospect of solid capital growth and a pickup in rental growth in the year ahead,” he adds.
London – the engine room of the commercial property scene – is supply constrained which will push rents up in the next few years, he argues.
“Contrary to the perception that London is one large building site, the reality could not be more different.
“Indeed, there is very little high-grade property currently available with few developments in the pipeline from 2015 through to 2017.”
Meanwhile, the capital is not the only game in the country, with capital values of regional buildings likely to rise as well.
“There is a shortage of high quality prime space in the regions, where the availability of grade A stock has fallen by nearly 40 per cent over the last four years or so,” he explains.
That will be short-lived, however, as there are 5 million square feet of supply in the pipeline for the next few years.
The main risk to property is a wobble in the UK’s economic recovery, Brunner says.
Interest rate hikes will hit the asset class, but they appear to be on the backburner till later in the year, he notes.
Also, some buyers may delay deals in the lead up to the General Election in May, he adds.
“Overall, the economic environment should remain favorable for commercial property with the asset class supported by high levels of income together with capital value and rental growth,” he says.
“Current forecasts of 9 to 10 per cent total returns for 2015 could well be revised higher as the year progresses.”
Income is the most important aspect of property returns, he says, with 80 per cent of the total return since 1987 coming from rental payments.
Since the 1987, the IPD All Property index has climbed 900 per cent or an average of 9 per cent each year.
By http://www.fundweb.co.uk/news-and-analysis/alternatives/can-property-post-a-third-year-of-double-digit-returns/2017479.article
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