Britain’s commercial property markets delivered the largest monthly capital growth since June 2006, at 1.1%, according to the September IPD UK Monthly Index. This increased pace of market acceleration brings third quarter growth to 1.2%. While the monthly capital growth figure is the largest in more than three years, it was contained by continued falling rents.

Yield impact, which measures the influence yield movements have on capital values, was 1.75% - - the strongest positive figure since December 2005, and but for downward rental pressure would have been translated fully into capital growth. However, the pace of falling rental levels picked up again in September, to -0.64%, after easing on a monthly basis in August.

IPD, a leading producer of property market data said all three sectors delivered positive capital growth for the first time since May 2007, led by Retail 1.4%, followed by Industrials at 1.1%, while Offices returned its first positive capital growth since July 2007 with 0.8%. All property initial yields compressed for the fourth month to 7.7%. The 12-month change in capital values has fallen to -25.3%, falling from a record high of -31.5% for the year to May 2009.

Over September, income returns held steady, at 0.7% contributing to a monthly total return of 1.8%. Vacancy rates over the month, which measures vacancies as a percentage of total databank rental values, stood at 11.1%.

European property funds

The European real estate funds held by institutional investors delivered a euro returns for the year to June 2009 of -24.5%, as measured by the IPD European Pooled Property Fund Indices (e-PPFI).

In the first ever half-year measure of institutional European unlisted pooled funds, IPD has captured an even larger sample than the e-PPFI to December 2008, reporting the NAV (net asset value)-based total return of 216 predominantly core and value-added funds representing a total NAV of €59.8 billion. The all balanced and all specialist funds delivered returns of -20.3% and -29.1%, respectively.

“Returns from European pooled funds reflect a mix of underlying direct property market performance, currency movements and leverage,” explains Cameron McVean, Head of Fund Services at IPD. “Two of these key drivers have changed directions since the New Year and these changes go a long way to explain the euro-denominated -24.5% total return: firstly, a slow reversal in underlying direct property market value movements and, secondly, a modest strengthening of sterling relative to the euro.”

Across the database, the spread of returns varied considerably – the performance for the 10th and 90th percentiles were -50.8% and +4.6%, respectively. Fund leverage explains much of the difference in performance between balanced and specialist funds, with their average gross loan-to-value ratios standing at 29.1% and 44.2%, respectively.

In respect of geographic-focused funds, institutional funds which predominantly invest in France delivered the best returns over the 12-month period under review, at -1.5%, followed by German-focused funds, which delivered -3.9%. Pan-European funds delivered -11.1%, while at the other end of the spectrum UK-focused funds delivered -38.9%, although virtually all of this negative return relates to the second half of 2008.

The European PPFI, with historical performance reported back to the start of the decade, broadly reflects the wider European unlisted property fund market in terms of size, geography and fund type. The average fund size within the database, for example, is €277m.

IPD said, by comparison with other investments, institutional European pooled funds outperformed property equities, which returned -36.6% over the 12-month period as measured by the FTSE EPRA/ NAREIT Index, while marginally underperforming equities by 30 basis points, at -24.2%, according to the MSCI Europe Index. However, unlisted European property funds underperformed European bonds, which returned 10.9% over the 12 months.