UK property remains attractive – IPD
The IPD says UK commercial property total returns fell to 2.7% in 2012, from 7.8% in 2011, as a result of falling capital values across the regions (down 3.1% overall) – but it points out that UK property remains an attractive investment prospect, outperforming Gilt yields despite the difficult economic backdrop.
Income returns meanwhile held up at 6%, which the IPD says will bring some relief to investors who have maintained cash flows despite muted occupier demand – rents remained flat for the year. “Income continues to make property an attractive investment medium for investors, amidst the volatility of equities and low yields off gilts,” the IPD points out.
The gap between Central London and the rest of the UK continued to widen last year. Values in Central London rose 5% in 2012 but declined by 5.8% outside the capital. “This polarisation in property prices has now reached unprecedented levels. Since June 2009 the divergence has widened to over 35% between Central London and the rest of the UK,” the IPD notes. But pricing for prime assets in London has driven income yields down to 4.3% for retail property and office space, as overseas investors have competed for assets perceived as safe havens.
The IPD’s says its new prime/secondary lease analysis has demonstrated for the first time the attraction of ‘quality’ secondary stock. It says over the past four years, long leased secondary stock has delivered higher returns than prime assets with short leases, thanks to a combination of strong income returns and more competitive pricing. Last year, secondary long leased assets returned 3.6% compared with 4.1% for prime long lease and 2.7% for prime short lease, the IPD says. “However, while secondary long leased property is based on a 6.4% initial yield, with no reversionary uplift, prime short leased assets offer stronger income growth prospects, with a current reversionary yield of 7.8% – despite an initial yield of a little over 5%,” it points out.
Phil Tily, IPD UK and Ireland managing director, says: “The question for 2013 is whether it will be a more level playing field over the next year. What we do know is that those funds performing the best over 2013 will focus very much on asset management, which is where the transparency of the UK sector really matters.”
