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.
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 the year.
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 real estate.
"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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