News

UK commercial property recovery builds as rental growth comes back for all sectors

May 06, 2014

The recovery in UK commercial real estate was further confirmed during the first quarter of 2014, as values rose by 2.2% for all property, contributing to a total return of 3.7% for the period, according to the IPD UK Quarterly Property Index.

Although this represented a slight deceleration since Q4 2013, a return to rental growth for all sectors provided further evidence of the solid foundations now underpinning the market.

The prevailing long-term recovery in the UK market was confirmed by a total return for the year to the end of March of 13.3%, significantly up on the annual return to end-2013 of 10.5%; this was also the highest level recorded since 2010.

Investors will be encouraged by significant value gains right across the UK market in Q1 2014, both by sector and by region. The office sector led with a total return of 4.9% for the quarter, based on the strongest capital value growth of 3.6%, re-enforcing the lead it has held over the last six quarters. Industrials were just behind, returning 4.8%, though this owed more to their higher level of income return at 1.6% for the quarter when combined with value growth of 3.1%.

Retails were the lowest-returning of the sectors with 2.6% for the quarter, but crucially saw positive rental value movement following over 20 quarters of continuous decline since Q3 2008. Reviving consumer confidence is at last boosting retailers’ demand for space, even if as yet this remains confined to the central London market. While rental values for shops in the South East of the UK rose by 0.7% over the quarter, those for shopping centres and shops in the rest of the UK remained flat.

Capital values continued to rise across virtually all regions in Q1 2014, with the most notable regional improvements in the office sector. Offices in the South West, North West, Yorkshire and Wales all saw gains in their levels of capital growth compared to the previous quarter.

Offices in the rest of the South East are now challenging London’s West End in performance terms, each returning equally strong returns at 5.3% for the quarter. These were however both surpassed by West End retails, which returned 6.4%. The continuing strength of central London underlines its reputation as a safe haven for international capital.

The overall total return to UK real estate, at 3.7% for Q1 2014, exceeded the performance of both bonds and equities over the period, which stood at 2.5% and -1.5% respectively (JP Morgan 7-10 year/MSCI UK).

Phil Tily, Executive Director and Head of UK and Ireland, IPD, said: “The impressive UK GDP growth results just released for Q1 2014 underline the strength of the recovery in commercial real estate, as shown by the IPD Quarterly figures. We have now seen four successive quarters of rising values, and over the past year these have become more broadly spread across the UK regions.

“The growth in values across the board reflects the continuing revival in investor confidence as market fundamentals solidify. Increased levels of economic activity are being reflected in rental values which are now starting to rise in all sectors.”