UK Commercial Property Sector Affected by Stagnant Economic Performance

Posted on 10 November, 2011 by MOVEHUT

According to the latest IPD UK Quarterly Property Index, slow economic performance in the UK has been passed on to values in the commercial property sector through diminishing occupier demand.

The index shows, all property level capital growth slowed to just 0.3% and total return to 1.8%. This is due to the idle economy, increasing inflation, stringency measures and the general concern about the UK’s ability to avoid recession.

These factors have combined, and as a result rental growth has dwindled in the third quarter to just 0.1%, while wandering further into negative territory for both the industrial and retail sectors, both at -0.2%.

Malcolm Frodsham, research director at IPD commented: “Investors are still coming into the market, viewing it as a ‘relatively’ safe haven during very uncertain times”.

He further added: “Purchase activity increased in the third quarter by 14.6%, despite fears that too much stock was becoming available, particularly in Central London. Buyers are not just high net worth individuals and international investors, various UK funds have also been investing, chasing the now all important income return”.

Equities returned with -13.5% over the quarter, property equities -20.8%, whilst Bonds yields staying low. With steady income returns of 1.5% and a still encouraging total return, commercial property continued to look attractive to investors.

In the midst of the increased transaction activity, net investment for the quarter was £1.5 billion, or 1.3% of the IPD Quarterly Universe’s total capital value, with authorised property unit trusts the largest investors over the quarter.

Net investment into other assets has risen distinctly over the quarter, at £402 million, or 5.9% of the segment’s total capital value. The ‘other’ segment includes student accommodation, healthcare assets, hotels and other leisure commercial properties, and is now larger than the IPD regional office segment and the City office segment, as investors look at even more ways to diversify their portfolio. Over the last 12 months the size of the segment has risen by 21.3%.

Frodsham states: “The impact in consumer spending has been quite severe, and thus the retail sector is one of the hardest hit, as people have less money in their pockets.”

Shopping centres saw a drop in values for the very first time since September 2009, down 0.4%. Rental falls for the segment, which have been ongoing for 12 consecutive quarters, currently amount to 11.1%. Standard high street commercial property retail units outside of the south East, have now seen an intensifying fall in rents of 10.6%.

On the whole, the retail sector recorded 0.1% capital growth for the quarter. There have been positive retail stories, but only in the West End, supermarkets and retail warehouse segments. Malcolm Frosham added: “Supermarkets are one of only two retail segments in our index that have seen an increase in capital growth, to 0.8%, due to their a-cyclical tendencies in a period of falling consumer spending”.

Office performance has been quiet. Central London capital growth, which lifted the sector through recovery, has started to decline, down to 1.1%, from 2.8% last quarter. Outside of London, growth was negative across all areas; however capital declines were slowing in the South East, while rental values were in decline for the majority.

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