UK long income property reached an all-time high of 4.1% in Q4 2021

In the final quarter of 2021, the CBRE Long Income Index delivered its highest quarterly total return of 4.1%, taking its annual returns for 2021 to 14.2%.  

The CBRE Long Income Index – the only index that tracks the performance of assets held by specialist long income funds – had been outperforming the mainstream market for three and a half years. However,  unusually strong returns in the second half of 2021, primarily in the logistics sector, has reversed this trend, with the CBRE Monthly Index recording annual total returns of 19.9%.

Capital value growth also reached an all-time high of 3.1%, and rental growth was exceptionally strong at 0.7%. However, this was almost exclusively driven by office assets which recorded a 2.9% increase in rents over the quarter.  

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 the broad sector of the asset. Across these different structures varying patterns of performance played out over Q4 2021:  

·         Sale and Leasebacks performed strongest, delivering a total return of 4.5% thanks to capital growth of 3.3%.

·         Ground Rents saw total returns of 3.6% off the back of capital growth of 2.9%.

·         Income Strips were the weakest, with total returns of 3.3% and capital growth of 2.5%.

On the pricing side, long income yields inched in over the quarter, declining by -4bps. In contrast, yields in the mainstream market rose by 150bps. The fall was fairly uniform; Sale & Leasebacks and Income Strips declined by -4bps, whereas Ground Rents saw a 3bps fall.

The Internal Rate of Return (IRR), a key benchmark by which investors assess opportunities in the long income market, has increased. At the Index level, long income IRRs increased by 28bps over the quarter; those on Sale & Leasebacks were up 33bps, with Income Strips moving up 22bps and Ground Rents 16bps.

Jen Siebrits, Head of UK Research, CBRE

As these results show, long income property has remained resilient over the Covid pandemic and continues to strengthen. Long income had outperformed the mainstream market for three and a half years, up until the second half of 2021. However, this does not reflect weakness in long income, rather it reflects an unprecedented increase in the Monthly Index, partly as a result of strong growth in logistics, but also the market rebounding from the pandemic downturn.

Jen Siebrits, Head of UK Research, CBRE