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Tuesday, May 23, 2023

UK office market rental surge overhauls retail property

The surge in UK office market rental growth overtook retail property in the first three months of 2006, for the first time since at least 2001, the new Quarterly Index from global real estate performance benchmarker, Investment Property Databank shows.

"Offices were the best performing sector of the UK property market in the first quarter, with faster rental growth than in the retail sector," IPD research manager Dominic Smith said.

"Total investment returns (capital growth plus rental income) on all UK commercial property were a very respectable 4.5% between the end of December and the end of March - the fourth highest level in the history of the quarterly index to the start of 2001."

The FTSE all-share index returned 8.1% and government gilts produced a negative return of -1.1% over the same period.

IPD's UK Quarterly Index, launched this month, reflects the performance of 7,214 properties valued at nearly 100 billion in 173 separate funds and is intended to supersede the annual index, in place since 1986, as the standard industry record of returns within the next year or so.

IPD has also developed a new series of in-depth reports on its monthly and quarterly UK indices. These 'Impulse' reports make available to the broad investment community sophisticated analysis of IPD's data, that was previously only accessible to a select group of subscribers.

In the latest Impulse analysis for the Quarterly Index, author Dominic Smith highlights the increasing disconnect between UK property yields (rent as a proportion of capital value) and the yield on UK government gilts.

The theoretical 'Plimsoll Line' for the risk premium of property over gilts is 2%, below which bricks and mortar are traditionally viewed as being overpriced. The all-property equivalent yield fell to 5.72% at the end of the first quarter from 5.88% at the end of the fourth quarter of 2005, while the FTSE 5-15 year gilt yield rose to 4.32% from 4.09% over the same period. This reflects the weight of investment money chasing property.

On the other hand, this narrowing in the yield gap to 140 basis points could be interpreted as a rational response to an improving property occupier market.

For the second successive quarter, offices were the best-performing property sector between January and March this year, with total investment returns of 5.4%, compared with 4.2% for retail and 4.1% for industrial real estate.

Once again, London's West End topped performance in the office segment, with total returns of 7.3% in the first three months of 2006, only slightly below the 7.6% posted in the fourth quarter of 2005 and the third highest quarter achieved by any property segment in the history of IPD?s Quarterly Index.

There was considerable divergence in the performance of various types of UK retail property in the last quarter with shopping centres within towns returning 4.4%, or four times as much as out-of-town shopping centres at just 1.1%.

Fashion parks were the star performer of the retail warehouse segment with total returns of 5.9% exceeding those of retail parks and 'solus' (single) units at 3.9% and 4.2% respectively.

The best returns to be had in the retail market, however, were delivered by supermarkets at 8.0% in the first quarter. Previously a relatively insignificant segment in the IPD database, the supermarkets sample was boosted to 2.0 billion in the Quarterly Index by a wave of sale-and-leaseback deals.