UK commercial property returned 10.9% in
2013, according to the
IPD UK Monthly Property Index
[pdf], the strongest annual
performance since 2010, coming in ahead of a consensus forecast of 8.6%.
The index, which measures over 3,300 investment grade
assets worth £34bn, reported an increase in property values of 3.8% overall in
2013, and income returns of 6.8%.
Total returns for December rose to 2.1%, their highest
throughout 2013, and 170 basis points higher than the 0.4% reported in January
at the start of the year.
Ireland is one of 'hottest' hotspots for European commercial property deals
A flurry of transactional activity at the end of the year
led to a strengthening December return and pushed the monthly increase in
property values to over 1.5% - its highest since March 2010.
The notable turnaround in performance was dominated by a
further improvement in investor sentiment, which has been enhanced by a return
to overall rental value growth, where the level rose by an average of 0.6% over
Comparatively, equities returned 18.5% for the year, and
bonds -5.2%, and returned 1.6% and -1.8% respectively for the month of December
(MSCI UK, JP Morgan 7-10 year).
Returns for UK commercial property improved steadily
throughout 2013 as wider macro-economic conditions improved and confidence
subsequently grew in assets outside of prime or Central London locations – a
turnaround from previously declining property values.
In January 2013 only three regional UK markets measured
recorded rising property values, out of a total of 30. By December, only one
market outside of London recorded falling property values.
Regional returns and property values have risen in line
with the flurry of economic data showing improvements in the fortunes of the UK
economy. The latest figures from the ONS (Office for National Statistics) reveal
GDP rose by 0.8% in Q3, unemployment fell to 7.4% in October, and house prices
rose by 5.6% for the year to November.
Despite this overall improvement, there remain divisions
between sectors – with setbacks in the retail sector still dampening returns.
While offices and industrials returned 14.4% and 14.2% respectively for the
year, the return on retail was just 7.6%.
Retail returns remain at the mercy of lacklustre occupier
demand and online competition. Capital values in the sector increased by just
0.8% over the year, and rents declined by 1.3%. Comparatively, values for
offices rose by 7.7%, and for industrial units by 5.9%, while rents increased in
both sectors by 3.3% and 0.7% respectively.
Phil Tily, executive director & head of UK and Ireland, IPD, said, "At
the start of 2013, few would have expected for the year to end with such a
flurry – but sentiment has improved drastically
along with economic performance. It’s safe to say that 2013
was the year when we saw a marked turnaround in the performance of UK commercial
"Critically, this has increased confidence in higher
yielding and heavily discounted regional assets, that has allowed growth finally
to spread out of the capital as investors look for improved income returns and
value add opportunities.
"While there will undoubtedly be setbacks, 2014 is
nevertheless shaping up to a good year for the commercial property sector."
Results from the IPD UK Quarterly Property Index and IPD UK Annual Property
Index 2013 are still to come.
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