At the end of 2003, the 237 portfolios and 10,800 properties covered by the Annual Index were valued at £105 billion -equivalent to 75% of the total property assets of UK institutions and listed property companies. The full Index tracks the three market sectors all the way back to 1971.
2003 saw another solid performance from the UK commercial property market, as total returns on standing investment properties improved to 10.9%, from 9.7% in 2002. Allowing for inflation, property has now delivered real total returns of at least 6% in nine of the last ten years, a run unprecedented since the start of the IPD record in 1970 and an impressive record for a supposedly cyclical asset.
Returns by Sector
For the second year running retails were the best performing sector with total returns of 15.5%. The retail market stood out as the one sector to see a rise in rental values in 2003, of 3.7% and in keeping with this record, retails saw the largest fall in yields of 40 basis points.
At the other extreme, total returns on offices remained depressed at 3.2% in 2003, reflecting a 10% drop in rental values. While capital values were partly protected from this drop by upward only rent reviews and by a 30 basis point fall in equivalent yields, office capital values nevertheless fell on average by 4.1%. The City of London saw the sharpest fall in rental values of 16.8%, followed by the Mid-Town and West End where rental values also fell heavily (by 15.6% and 13.5%, respectively), despite a lower level of vacancies. The one bright spot in the office sector was the provincial market where rental values held firm and total returns on city centre offices at 11.4%, marginally exceeded the all property average.
Industrials occupied the middle ground in 2003, with total returns of 11.3%. Although rental values were flat, capital values rose by 3.4%, thanks to a fall in yields of 30 basis points, mimicking the decline in office yields.
Property and Other Assets
Property´s total return of 10.9% was almost exactly mid-way between equities with returns of 20.9% and gilts with returns of 1.8%. Equities were boosted by the acceleration in economic growth and a turnaround in company profits. Gilts were held back by fears over inflation and the rapid increase in Government borrowing.