UK commercial property total returns fell to 2.7% in 2012 (7.8% in 2011), dragged down by falling capital values across the regions. Values fell by 3.1% for the year, while income returns held up at 6%, according to the IPD UK Quarterly Property Index.
Negative valuer sentiment drove the fall in values, as UK property underwent its most challenging year since the downturn and the economy slipped briefly back into recession.
Steady income returns will bring some relief to investors, who have maintained cash flows despite muted occupier demand (rents remained flat for the year). Income continues to make property an attractive investment medium for investors, amidst the volatility of equities and low yields off gilts.
Beneath the headline figures, the divergence in prices between London and the rest of the UK continued to grow. Over 2012, values in Central London rose by 5%, but fell by 5.8% outside of the Capital.
This polarization in property prices has now reached unprecedented levels: since June 2009 the divergence has widened to over 35% between Central London and the rest of the UK.
However, pricing for prime assets in the capital has driven income yields down to just 4.3% for retail and office assets, as competition from 'safe haven' international investors makes investment expensive.
Though the focus of investors has shifted increasingly to income producing characteristics - utilizing better value, more fringe or secondary assets, with secure leases and potential for active management for the moment there has still been little indication of improvement in the majority of regional or secondary sectors.
Pockets of secondary emerging
For the first time, new Prime/Secondary lease analysis has demonstrated the attraction of 'quality' secondary sector stock.
Four asset types were measured in the study: long leased prime, short leased prime, long leased secondary and short leased secondary properties.
Since 2009, the best performing asset type has been long leased prime. However, consecutively over the last four years, long leased secondary stock has delivered higher returns than prime assets with short leases due to a combination of strong income returns and more competitive pricing.
In 2012 secondary long leased assets returned 3.6%, opposed to 4.1 for prime long lease, and 2.7 for prime short lease.
However, while secondary long leased property is based on a 6.4% initial yield, with no reversionary uplift, prime short leased assets offer stronger income growth prospects, with a current reversionary yield of 7.8% despite an initial yield of a little over 5%.
Phil Tily, IPD UK and Ireland managing director said:
"Property is dividing the UK as London returns and the regions lose value. The sector is also split between those with capital holds and others seeking income.
Different investors have defined for themselves different objectives, and that is one of the beauties of real estate: its flexibility.
"However, there's no getting away from the bleak outlook these figures paint for some sectors. Commercial space is a key indicator of economic performance, so it's of little surprise to see regions faltering amid growing retail trauma and continued job cuts.
"But 2012 also delivered the first good news for parts of the secondary market, and the question for 2013 is whether it will be a more level playing field over the next year. What we do know is that those funds performing the best over 2013 will focus very much on asset management which is where the transparency of the UK sector really matters."
2012 fund type performance
Launched alongside the Quarterly Index, IPD's 2012 Benchmark Figures - which measure the performance of fund types across the year, and include the effects of transactions and developments - showed Large Life and Pension Funds to be the best performing fund type in 2012, returning 3.1%, against the benchmark total return of 2.8%.
The worst performing fund type was Balanced Monthly Funds, which returned 1.5%.