Commercial real estate returns increased by nearly 4% in the year to June 2018 and reached 9.3%, according to the MSCI/IPD UK Quarterly Property Index.
Capital values increased by 4.5% over the year, while income returns were 4.7%.
Sector performance varied hugely, with industrials delivering far higher capital value growth and total returns than any other sector – to the extent that industrial assets are now the lowest-yielding assets at the headline level.
However, according to the IPF UK Consensus Forecasts Spring 2018, this growth is soon to cease.
The MSCI quarterly index measures £161.8bn of commercial real estate assets around the UK across 224 portfolios and more than 9,000 assets.
On a quarterly basis property values have now risen for seven consecutive quarters, following the declines seen immediately following the referendum.
Headline capital growth has been largely supported by rental growth over the past two years as occupier demand props up values. But that growth has now started to slow, implying slowing demand from tenants for space.
At the sector level there are considerable differences. In the past three months only industrial and office assets have seen positive rental growth – with even residential seeing rents slip.
Industrial was the best-performing sector on a quarterly, annual, three- and five-year basis as insatiable demand for the distribution sector drives investment and yield compression.
Industrial yields are now lower than retail and office yields at the headline level.
Retail was yet again the worst-performing sector over the quarter, just delivering a total return of just 0.1%, and on an annual basis seeing returns of just 4.7% on average over the past three years.
Against other asset classes, direct real estate at the headline level has held up well, outperforming both equities and bonds for the year.
Over 10 years, direct real estate just underperformed equities – delivering a return of 6.7% – while listed real estate was the worst performing sector.
The outlook for real estate is less certain, though, with the IPF Consensus Forecasts predicting property values to go down at the headline level for the next two years.
And beneath the headline figures, offices and retail properties are predicted to see values decline, while industrial properties will outperform other sectors, though the sector’s capital growth will, however, slow massively from 2019.
Rental growth is more mixed, with retail expected to see better growth than offices in the next two years.
On average over the next five years industrial will deliver 6.3% pa and be the best-performing sector, while retail warehouses will deliver 5.2% and be the second-best performers. All property returns will be 4.8%.
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