UK commercial property values have risen for seven straight months, reports the Investment Property Databank (IPD).
And, even more encouragingly, there is nothing on the horizon to stop the upward climb as we enter 2014. In a separate report, Ignis Asset Management forecasts that we could well see a 11.5 per cent return on UK property investments next year.
By the end of November, the average value of shops, offices and industrial properties climbed 0.9 per cent from the previous month, said IPD. The overall increase — which combines changes in property values and rental income — was 1.5 per cent, the highest rise since March, 2010.
Prior to the April turnaround, income-producing commercial properties had lost value for 17 continuous months. By November office values had gained 1.4 per cent and warehouses 1.6 per cent. The average value of retail properties rose by 0.4 per cent during the seven-month rally.
Alongside rising economic confidence, this year “has seen a real turnaround in the performance of commercial real estate, with growth during the second six months slowly creeping further afield from London,” said IPD managing director Phil Tily.
In its November Consensus Forecast, the Investment Property Forum predicted an average return of 9.3 per cent for next year. Ignis Asset Management claims that is an under-estimate and has put its own expectations two per cent higher, with offices likely to produce a return of at least 13.8 per cent.
“Since the market started to recover in 2009, a more appropriate allowance for price discrimination across markets has been applied,” said George Shaw, manager of Ignis UK’s £1.1bn property fund. Despite concerns of the property market overheating, yields could well sustain a re-rating in 2014 without entering bubble territory, he added.
“Average property capital values remain about 30 per cent below the previous peak recorded in 2007. Those sectors that continue to face fundamental challenges remain significantly behind, while markets with clear growth prospects have recouped a much greater proportion of those capital declines,” said Shaw. “We are confident memories of 2007 are recent enough to prevent the industry going there again.”
While overall yields are expected to decline in the coming year, Ignis predicts an annualised total return of 8.7 per cent over the next three years. “We believe property yields can maintain a healthy margin ahead of gilt yields despite a forecast rise in gilt yields over the next five years,” Shaw added.
Barclays Plc has already predicted that UK economic growth will accelerate to 2.3 per cent during 2014 ahead of this year’s 1.4 per cent, boosting demand for retail premises, warehouses and office buildings and making it easier for landlords to raise rents.
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