UK long income property increases out-performance over the mainstream market
In 2018 the CBRE Long Income Index delivered a total return of 9.2%, down somewhat from the 12.4% reported in 2017 but comfortably ahead of the total return produced by the “mainstream” commercial property market in 2018, as represented by the CBRE UK Monthly Index of 6.3%. Long Income performance was driven by capital growth of 4.4% over the last 12 months.
The CBRE Long Income Index divides assets into three categories based on the structure of the investment, as this is a far greater determinant of performance than say the broad sector of the asset. Across these different structures varying patterns of performance played out in 2018.
- Ground Rents performed strongest, delivering a double-digit total return for the fifth year in succession, of 10.5%.
- Income Strips, which had been the top-performing structure (on a rolling annual basis) four the previous eight quarters saw performance decline fairly sharply to since for some time, delivered the highest total return of 7.6%.
- Sale & Lease Backs performed in line with the overall average, with a total return of 9.2%.
The Internal Rate of Return (IRR), a key benchmark by which investors assess opportunities in the long income market has declined over the last twelve months as competition for scarce supply of investment product has been intense. At the Index level Long Income IRRs decreased by -43bps in 2018; those on Sale & Lease Backs fells -46bps, with Income Strips moving -40bps and Ground Rents -13bps.
Investors clamouring to gain exposure to Long Income assets have been shown to have made the right call, as the sector has once again out-performed the mainstream market in 2018. Our Index shows that the final quarter of the year mirrored the pattern seen in the aftermath of the Brexit Referendum in Q3 2016; as the mainstream market stumbled, seeing values decline, the Long Income market was untroubled. With no end to the UK’s political and economic uncertainty in sight, it seems likely that Long Income will be a safe haven for investors for some time yet.