UK commercial property sector affected by slow economic performance

Slow economic performance in the UK has been passed on to values in the commercial property sector through declining occupier demand, according to the latest IPD UK Quarterly Property Index.

At the all property level capital growth slowed to just 0.3% and total return to 1.8%, the index shows, due to the stagnating economy, increasing inflation, austerity measures and general uncertainty about the UK’s ability to avoid recession.

These factors have combined to result in rental growth tailing off in the third quarter to just 0.1%, while straying further into negative territory for both the retail and industrial sectors, both at -0.2%.
 
However, investors are still coming into the market, viewing it as a ‘relatively’ safe haven during very uncertain times, said Malcolm Frodsham, research director at IPD.

‘Purchase activity increased in the third quarter by 14.6%, despite fears that too much stock was becoming available, particularly in Central London. Buyers are not just high net worth individuals and international investors, various UK funds have also been investing, chasing the now all important income return,’ he explained.

Equities returned -13.5% over the quarter, property equities -20.8%, while Bonds yields remain low. With steady income returns of 1.5% and a still positive total return, commercial property continued to look attractive to investors.
 
Amidst the increased transaction activity, net investment for the quarter was £1.5 billion, or 1.3% of the IPD Quarterly Universe’s total capital value, with authorized property unit trusts the largest investors over the quarter.

Net investment into alternative assets rose markedly over the quarter, at £402 million, or 5.9% of the segment’s total capital value. The ‘other’ segment includes healthcare assets, student accommodation, hotels and other leisure properties, and is now larger than the IPD regional office segment and the City office segment, as investors look to increasingly diversify their portfolio. Over the last 12 months the size of the segment has increased by 21.3%.

‘The impact on consumer spending has been quite severe, and thus the retail sector is one of the hardest hit, as people have less money in their pockets,’ said Frodsham.

Shopping centres saw a decline in values for the first time since September 2009, down 0.4%. Rental falls for the segment, which have been ongoing for 12 consecutive quarters, now amount to 11.1%. Standard high street retail units outside of the South East, have now seen a cumulative fall in rents of 10.6%.
 
Overall the retail sector recorded 0.1% capital growth for the quarter, as there have been positive retail stories, but only in the West End, retail warehouse, and supermarkets segments, and even here growth has been slowing. ‘Supermarkets are one of only two retail segments in our index that have seen an increase in capital growth, to 0.8%, due to their a-cyclical tendencies in a period of falling consumer spending,’ added Frodsham.

Office performance has been muted. Central London capital growth, which buoyed the sector throughout the recovery, has started to decline, down to 1.1%, from 2.8% last quarter. Outside of London, growth was negative across all areas, though capital declines were slowing in the South East, while rental values were, for the majority, in decline.