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UK commercial property market back in the black, influential report shows

Capital values rose over the third quarter of this year by 1.5%, a 5.6% improvement on the previous three-month period, according to the IPD UK Quarterly Property Index.

The total return to investors, including income as well as capital growth, was 3.4% over the quarter, up from -2.2% the previous quarter, bringing the 12-month return to -18.2%.
‘In nominal terms, these figures represent the first increase in capital values and positive returns for UK commercial property investment since the second quarter of 2007,’ the report says.

Third quarter and annual capital growth figures for the three principal sectors were 2.1% and -24.1% for Retail; 0.7% and -24.8% for Offices and; 1.5% and -22.1% for Industrials.

The driver of capital growth was a fall in market valuation multiples, reflecting increased demand by investors for real estate in the UK.

The running yield on commercial real estate had peaked at 7.7% in June, a figure three percentage points higher than June 2007.

But the impact of rental movements continued to be negative with rental value falls of -1.6% over the quarter. It is however, a sharp improvement on the falls registered in the first half of the year.

‘The rapid correction in market values in the UK has boosted market yields to over 7.5% and with sterling so weak, the UK market is proving irresistible to overseas investors,’ said Malcolm Frodsham, Research Director at IPD.

‘Of real encouragement last quarter was that while rents are still falling, these falls have finally moderated across huge swathes of the UK real estate market,’ he added.

This is in stark contrast to the situation in the US where the commercial real estate market is expected to remain depressed well into 2010.

Owners of properties such as office buildings, warehouses and malls are facing a surge of painful defaults and write-downs as the market finally faces up to the reality of its diminished conditions.