UK property rents continue to decline, but income volatility is low – IPD
UK property has underperformed equities and Gilts so far this year, as a result of its capital declines, says the IPD. Property returned 1.6% in the eight months since the beginning of 2012 compared with 7.0% for equities and 5.2% from Gilts. But income returns alone from property were 4.5% for the first eight months. The IPD says the low volatility of that income continues to make it an attractive alternative to equities and Gilts, which are still suffering from low yields (Gilts) and high volatility (equities).
The IPD, which will this week be exploring the characteristics of the UK property market further at the IPD/SPR RealWorld conference in Cambridge, noted in its UK Monthly Property Index report for August that rental values for UK property continued to fall last month, dipping 0.1%, and have now fallen a total of 0.2% over the past quarter as occupier demand continues to waver amid the economic downturn.
Between May 2008 and August 2010 rents fell at the All Property level by a total of 11%, the IPD notes, and since then they have largely stagnated. They remain more than 11% below their peak.
Behind the headline figure there are large variations across the UK, the IPD notes. Property markets in London have continued to experience positive demand from occupiers, with rental growth of 0.4% for City office space in August alone, but outside the capital rents have been in decline for much more than three months. The worst affected sectors – retail property in Wales, and Yorkshire & Humberside – have seen rents fall over the past year by 5.6% and 4.8% respectively.
The decline in rental levels, along with yield expansion, contributed to a further fall in capital values of 0.3% in August, the IPD says, but this was offset by an income return of 0.6% to result in a total return of 0.2% for the month.
The IPD’s managing director for the UK and Ireland, Phil Tily, says that although there is still some interest in heavily discounted assets in the regions, “with income yields sometimes in excess of 8%, without tenant and income security they remain a risky prospect for investors”.
“Until occupier demand starts to stabilise outside of London, which will inevitably be reliant on the UK coming back out of recession, and a degree of consumer confidence returning to the market, it is going to be difficult to sustain the high initial income over the long term,” he added.
