UK commercial property delivered a 14.5% total return last year the strongest return for four years, according to the IPD UK Monthly Index. In 2009, the total return was 2.2%.
The first full account of 2010 performance reveals positive capital growth continued unbroken throughout the year with the final month returning a modest improvement, at 0.3%. This contributed to an annual capital growth figure of 6.9%, compared to -5.6% in 2009, while last year's income returns were down from the 8.2% in 2009 to 7.1%.
The story behind the performance of the UK commercial property market in 2010 was one of decelerating capital appreciation over the first half of the year, before rates of growth weakened to a near standstill over the final six months.
Yield compression was the principal driver of capital growth, with initial yields falling 50 basis points to 6.5% by June, after which, yields shortened by 10 basis points for the final six months of the year. Over the full year, rental value growth fell by a modest 0.8%.
"The rebound in capital values, which emerged so aggressively at the back end of 2009, had virtually run its course by the mid way point of 2010," explains Phil Tily, UK and Ireland Managing Director at IPD.
Tily continued: "The recovery which has emerged over the last 17 months has been unevenly driven by London and the capital's office market in particular, which has seemingly been driven by a combination of global as well as domestic economic forces. A clear divide has returned to the UK property market London versus the rest of the UK which will be exacerbated as the impacts of the government's budget cuts take hold during 2011."
Headline sector analysis
At the sector level, Offices, was the strongest performer with 15.6% total return derived from the highest sector capital appreciation, at 7.9%, and an income return of 7.2%. The strong growth in this part of the market was aided by a 0.7% positive rental value growth over 2010 the only sector which delivered rental growth.
By contrast, rental growth was weakest in the Retail sector, at -1.8%. Despite which, capital growth remained robust, at 7.5%, which together with a 6.8% income return, helped deliver a total return of 14.7%.
The Industrial sector was the weakest performer over 2010. The recovery in capital values was much less pronounced with depreciation returning over the second half of the year, albeit modestly. An annual capital growth of 3.3%, together with an 8.0% income return, helped deliver an 11.5% total return.
Asset class comparison and longer term performance
UK commercial property delivered an identical annual total return to equities, at 14.5% in 2010, compared against the FTSE All Share Total Return Index, after a substantial final month rally in equity markets. Both asset classes outperformed bonds, which delivered investors 9.1%, as measured by the FT Gilts 5 15 Years Index.
Over three and five years, bonds come out on top between the three asset classes, with 7.7% and 5.9%, respectively. This compares with 1.4% and 5.1% for equities, over three and five years, and -3.2% and 0.2% for UK commercial property, respectively.
The IPD UK Monthly Property Index is based on a sample of 3,648 properties covering £33.2 billion at the end of December 2010