UK commercial property returned 1.7% in September, significantly up on the 1.4% return for August, as capital growth reasserts itself. According to the IPD UK monthly index, the strong result was driven by a 1.2% rise in capital values, as income return remained stable at 0.5% for the month. September’s returns represented the second-highest monthly return of the year, eclipsed only by the June result.
Once again yield compression was the main driver of rising values, but rental values also rose significantly, with moderate rises in retail rents seen right across the UK – for the first time in the current recovery. According to the index, values have now risen by 14.1% over 17 months of consecutive growth, and overall they are now less than 29% off the peak levels of 2007.
The UK commercial real estate return of 1.7% for the month compared favourably with the performance of other asset classes in September, bonds returning -0.3% and equities -2.9% (JP Morgan 7-10 yr/MSCI UK), re-establishing the pattern of outperformance enjoyed by UK commercial real estate in most months since July 2013.
Offices rejoined industrials as the leading sectors in the market during September, both returning 1.9% over the month, while retails trailed once again on 1.4%, lagging the other sectors as they have done continually since the start of the capital value recovery in May 2013.
From a regional perspective, central London shops were the strongest-performing market, recovering from something of a blip in August to return 3.6% in September; this has been the stand-out location for UK retail through most of the current recovery. Other regional hot spots in September included outer South East and outer London offices, which returned 2.6% and 2.4% respectively over the month, while London also represented the strongest industrial region, returning 2.3%.
But rental value growth also made a significant contribution to rising values in September, averaging 0.4% for the month, its highest level since June and the second-highest of the current recovery. Perhaps most notably, retail rental growth reached 0.3%, its highest level since March 2007, although offices remained the strongest rental market. In regional terms, outer London and outer South East offices saw the strongest rental growth in September at 1.2% and 1.0% respectively, while all retail regions and property types saw increases, the first time this has happened during the current recovery.
The average UK equivalent yield of 6.6% at the end of September 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.
Phil Tily, executive director and head of UK and Ireland, IPD, said: “The September figures confirm that strong growth is continuing across the UK commercial property market, primarily on the back of positive sentiment on the part of both domestic and overseas sources of capital. It is also encouraging to see rental values now playing an important part in the recovery, particularly in the retail sector where they have now grown consecutively for the past four months.”
Paraphrased from Bridget O'Connell's article on the Estates Gazette website. Click here to see the article online.