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News : Property Last Updated: Dec 11, 2012 - 7:23 AM

UK Commercial Property: Twelve months of negative capital movement but positive total returns
By Finfacts Team
Dec 11, 2012 - 7:18 AM

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Twelve consecutive months of negative capital  movement in the UK means property values, at the headline level, have fallen by a cumulative -3.5% since November 2011, according to the IPD UK Monthly Property Index. Despite the falling values, caused by uncertainty amongst investors and occupiers alike, total returns have remained positive each month, backed by an income return which has not fallen below 0.5% per month. A separate IPD report says commercial property values for the UK, at the headline level, remain 32% below their pre-recession peak.

Total return for October was 0.3%, a small increase on September, as capital declines eased slightly, to -0.3%. However, little has changed in the regional markets – selecting the main 22 sectors measured by IPD, all those outside of London, except supermarkets, were still seeing declining values this month.

Austerity cuts stifling regional demand?: Though the news that the UK economy emerged from recession last month was welcomed across the industry, the effects of austerity cuts and slow economic growth have continued to lead to sluggish occupier demand – with rental values falling by a further -0.1% in October, their fifth consecutive month of decline. Outside of the South East, rental values fell by up to -1.0% in October alone in one of the more beleaguered parts of the market, rest of UK standard retails. Current yield levels continue to drift out, with investors mindful of lacklustre occupier demand, and their ability to re-let at current rental levels.

Phil Tily, IPD managing director for UK and Ireland said: “Twelve months of falling capital values marks another rather unfortunate milestone for the UK property sector, but there has been some improvement in underlying performance for the last few months.

“Unfortunately, occupier demand and valuer sentiment remain extremely unsteady, and there has been little good news to boost either. For every positive report regarding the economy, another causes dismay, and this is taking its toll on yields and rental values outside of London.

“The UK’s recovery is expected to be slow and difficult, and it looks like this is set to be the case for the property market too, but investors can, at least be thankful that though the situation could have been a lot better over the last twelve months, it could also have been a lot worse.”

Asset class comparisons: In the last twelve months, property has underperformed both equities and gilts, due to its capital declines, returning 3.1%, against 9.8% from equities and 7.6% from Gilts (British government bonds).

However, income return alone was 6.8% for last twelve months, and the low volatility of that income offered on UK property continues to make it an attractive alternative to Gilts and Equities, which are still suffering from low yields and extreme volatility respectively.

Furthermore, since the downturn, the focus of UK property managers has been to stabilise and secure income streams, through effective asset management.

In a separate report [pdf], IPD said many regions have seen values for secondary stock slump to a new low, more than 50% below their pre-recession peaks – and these declines have shown no sign of abating in the last year.

In the worst hit secondary market, South West offices, which has recorded a fall of over 65% from the market peak in Q2 2007, the declines have been comparable to those seen in Ireland, where office prices have fallen by 65%.

The worst hit region for retail has been the North West, where values have fallen 55% from the market peak.

IPD said that while London‟s prime assets have held up well due to its 'world city' status, values in many areas of the country have been slashed, and over the last 12 months have recorded falls of over 12%, according to the first IPD Regional Yield Quartile Analysis - - which measures the performance of prime and secondary retail, office and industrial stock, as defined by equivalent yield quartile, across 11 UK regions.

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