Monthly Index - UK Property Market Remains Resilient in September
London, 6 October 2010 – The UK commercial property market continued to show resilience in September, against broader market expectations of a slowdown, according to CB Richard Ellis’ latest UK Monthly Index. September’s commercial real estate return continued to point to a strong overall result for 2010 as a whole.
September UK Monthly Index snapshot:
• All property saw capital growth of 0.3% and a total return of 0.8%.
• Offices were the top performing sector, with capital growth of 0.6% and total returns of 1.1%.
• Industrial was the weakest performing sector, with total returns of 0.6% and neutral capital growth.
• All retail sub-sectors saw positive capital growth, with standard retail and retail warehouses growing 0.3% and shopping centre values growing by 0.2% in the month.
• All Property rental values were flat in September, with growth in some occupier markets offsetting continuing declines elsewhere.
Nick Parker, Senior Analyst with CB Richard Ellis, said: “UK office markets are being driven by the outperformance in Central London offices. This is where investor interest is most focussed, and where there are still signs of downward yield pressure. There is very little evidence that markets outside of London are likely to see any more significant upside in pricing for the time being.
“UK commercial property values have grown by 7.9% during 2010 and by 19% since June 2009. However, property values still remain 33.3% below their 2007 peak. Interestingly, the yield gap between property and government bonds hasn’t narrowed by as much as during previous cycles, with an approximate 400 basis point positive yield gap at present. This underlines the fact that the current risk premium remains elevated due to ongoing concerns over growth prospects and worries about income security in many occupier markets.”
Highlights from September’s UK Monthly Index:
• Capital values for All Property grew by 0.3% for the second month in a row in September, with total returns of 0.8%. However, the divergence between sub-sector performances persisted, with central London values delivering a far stronger performance.
• Offices were the strongest sector – returning 1.1% overall – but solely driven by the strength of the central London office market, which saw total returns of 1.7% and capital growth of 1.3%.
• Office markets outside the capital continued to underperform in September, with the Rest of UK offices seeing their first negative total return since June 2009, down 0.4% on August.
• Rental growth at the All Property level remained flat in September, but there was a strong variation between sub-sectors.
• Industrial property saw a correction of 0.4% in rents in September, as they continue to lag the wider improvement seen across most other UK property markets.
• Strengthening occupier markets in the core Central London office markets aided their outperformance this month, with the secure income and lower perceived risk causing further downward yield pressure in this sub-sector.
• Property yields on the whole stayed flat in September at 6.8%, with the downward momentum brought about by resurgent investor interest seemingly near its end despite the large gap in pricing with government bonds.