UK commercial property returns remained steady in July, at 0.8%, as regional improvements continued but growth in London slowed, according to the IPD UK Monthly Property Index.
Capital values at the headline level grew for the third consecutive month, by 0.2%, while income returns constituted the bulk of returns, at 0.6%. Comparatively, bonds returned 1.0% and equities 6.6 (JP UK Morgan 7-10 Year, MSCI UK).
Returns for the three main sectors remained relatively stable, with offices returning 1.0%, industrials 1.0% and retails 0.5%.
The slight gains seen in regional markets, which began in May and gathered momentum in June, continued in July. Industrial units around the UK are now seeing capital growth, as well as office markets around the South, though offices in the South East saw their growth slow considerably from June.
IPD said that even the retail sector, which continues to deliver the lowest returns off the back of still negative capital movements, saw a recovery in regional markets. Standard shop units across the South East, Midlands and South West saw rising returns as capital declines either eased or halted, while shopping centres and retail warehouses recorded improvements.
Slowing capital growth in central London retail, which dropped from 1.2% to 0.5%, was actually stopping the sector from delivering positive value growth at the headline level.
All property rental growth, which was 0.1% in June, slipped back down to 0.0% in July, mainly due to slowing demand for space in the office markets, where growth last month of 0.4% fell to 0.1%.
This was largely driven by slowing demand for space for Central London offices. Rental growth in the City fell 70bp to 0.1% in July, and for Midtown and the West End slowed to 0.0%. Outside of London, mild improvements in regional demand continued, with most office and industrial segments, and retails in the South, seeing flat or slightly positive growth in rental values.
Phil Tily, executive director & head of UK and Ireland, IPD, said, “Governor Mark Carney’s recent announcement regarding the Bank of England’s future monetary policy should continue to encourage investors in and towards commercial real estate.
“Unless the UK meets any of his ‘targets’, then interest rates and bond yields are going to remain low, and that means investors will continue to look for good value add and income opportunities in the real estate sector. The benefits of which are already becoming evident with modest improvements emerging in the performance of the regional markets.
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