UK commercial property delivered a total return of 8.1% during 2011, according to the IPD UK Monthly Index.
This was a decrease from 2010, when the total return was 14.5%.
Capital growth slowed to 1.2% last year, while income return amounted to 6.8%.
In December, capital values fell for the second consecutive month – by -0.1% – meaning there was an overall decline in values during the last quarter of 2011.
Total return, which stood at 0.5% for all property in December, was down in all three market sectors.
“While growth for the year remained positive, the outlook for 2012 is less than ideal,” said Phil Tily, IPD managing director UK and Ireland.
He continued: “During the last three months of the year, as the euro situation worsened and the threat of recession increased, returns tailed off considerably. The retail sector was the hardest hit in Q4, seeing values fall by -0.3%, while industrial values fell by -0.2%. Office growth remained positive, at 0.2%, but even this represented a considerable slowdown.”
“Hopes were high at the beginning of 2011 – sectors such as shopping centres and City offices were expected to perform well – and by mid-year talk was about a recovery in the secondary sector. However, the worsening situation in 2011 has seen expectations cut, and 2012 may be a year of re-evaluation in regards to pricing levels, and a heavy concentration on income,” added Tily.
For the first time in 27 months, City offices saw their values fall, by -0.1%. After losing about 50% of their value during the 2007-2009 period, they recovered about 35% until November 2011.
“Investor demand has remained strong over the last year, but yields had a negative impact in November and December, as investor sentiment was hit by the overall uncertainty in the market and reduced prospects in the financial services sector. Rental growth, though still positive at 0.3%, has been disappointing compared to expectations.” continued Tily.
“In the West End, where the market is a lot tighter, and where supply is more restricted, capital growth remained strong in December, at 0.7%.”
“Challenges in the occupier market have been noticeable in the retail sector, where rental values continued to fall, -0.1% for December, and -0.9% for the year. This, with a further softening of yields, has seen values fall -0.2% in December,” continued Tily.
Regional variations in performance are especially evident among shopping centres, according to IPD, where December returns remained positive in London and the south, at 0.4%, but with a -0.5% return in the rest of the UK.
Outside central London, standard retail units across the UK recorded either flat or negative value movement for the month. The hardest-hit areas, the South West, Wales and Yorkshire and Humberside, saw values fall by -0.7%, -0.7% and -1.0% respectively.
daniel.cunningham@estatesgazette.com
