UK commercial property latest 7th November 2013

Landlords and investors will receive welcome news this week that commercial property across the UK regions has returned to growth.

The performance of property is a key indicator of business confidence, as companies choose to take on commercial leases when they are expanding or hiring more staff. Having fallen by 7.3% over the last two years, capital values of offices, shops and warehouses outside of London rose by 0.8% in the third quarter of 2013 according to the IPD UK Quarterly Property Index.

Although regional values remain below their 2007 peak, the latest index results also highlight the growing extent to which economic improvements have filtered out of the capital. Improved occupier demand and valuer sentiment increased headline level total returns to 2.8% in Q3 across all property, as capital values increased by 1.3%.

The total return for London measured 3.5%, while returns for the rest of the UK rose to 2.4%, their highest in over three years. Comparatively, bonds returned 0.0% and equities 4.9% in Q3 (JP Morgan 7-10 yr/MSCI UK). A more widespread recovery this quarter is evident by the improved rates of return recorded in each of IPD's standard market segments.

The major beneficiary of growth this quarter was the South East office market, which closed in on central London retails as the best performing sector of the market, with a 4.3% rate of return. Phil Tily, IPD Executive Director & Head of UK and Ireland, said, "Price pressure in the prime end of the market is prompting investors to venture further afield in search of higher required rates of return, buoyed along by the prospects of improved economic growth." Rents rose by 0.1% overall for UK property in Q3, with London rents rising by 0.6%, while regional rents (which are still falling), saw these declines slow to just -0.1%, their lowest level since 2008.

Performance outside of London remains patchy, but for the first time since 2010 values overall are increasing at a headline level. Of the UK's top 27 towns and cities after London, 23 reported an improvement in property prices, with the strongest performance coming from Brighton, Cambridge, Guildford, Oxford and Aberdeen. These second tier cities remain heavily discounted. Values are over 35% below their pre-recession peaks in the majority of the cities measured, while rental declines for many over the period remain in double digits. Income yields are generally in excess of 6.5%.

Capital growth continues to strengthen across all three sectors. Overall, offices delivered a total return of 3.5% in Q3, narrowly getting the better of the industrial market, which returned 3.4%. Retail performance, while improving, remained more subdued at 2.2%, their values having risen by just 0.7%.

Take London out of the eqation and returns in the retail market amounted to just 0.6% in the last quarter, hightlighting the challenges still faced by this sector of the market. Rents for retail units outside of London fell by 0.3% in Q3. Tily added, "The divide between London and the rest of the UK has reached unprecedented levels over the last six years, but with economic improvement spreading out of London, investors in the regions are starting to benefit from improved rates of return."