UK commercial property values grew for the first time in 18 months in May, as sentiment and occupier demand continued to improve in the UK property market.
According to the IPD UK Monthly Property Index, the fractional capital growth, of just 0.01%, came from improvements in the office and industrial sectors, with the industrial sectors growth positive for the first time in two years. The retail sector continued to act as a drag, but falls were their lowest since late 2011.
The results come alongside various reports of improving economic conditions in the UK, with construction figures up, service sector growth strong, and household spending and solvency improving.
Total returns for May rose to 0.6%, driven by income returns of 0.6%. Bonds returned -2.3% over the same period, and equities 2.8% (JP Morgan UK 7-10 year, MSCI UK).
UK property values started to decline for the second time in November 2011, as domestic demand relapsed around austerity cuts and wider macro-economic concerns battered investor confidence. In the intervening 18 months, property values declined by a total of 4.9%.
When added to the 2007/9 falls, this means that UK property, on average, remains over 37% below its pre-financial crisis peak.
In comparison with the property crashes of the 1970s and late 1980s, this is the deepest property recession on record, and the slowest recovery. In both earlier crashes, within six years values had recovered to around 20% of their pre-crash levels.
London has remained the main driver of property values, with the majority of regional assets still seeing declines. However, as confidence has returned to the market over the last few months, these regional declines have slowed considerably, and it is these improvements that have tipped the scales at the headline level.
Some regions are now starting to see positive growth in values, with specific office and industrial markets in the South and East recording positive capital movements in May, as did distribution and logistics centers around the UK.
Rental vales, an indicator of occupier demand, have also started to grow in these areas, and saw improvements at the headline level, indicating an increase in occupier demand emerging outside of London.
Provided sentiment does continue to improve and now further wider macro shocks impact, the UK’s regions have much to offer investors. Yields for ‘safe haven’ shops and offices in London are now just 4.1% and 4.3% respectively, but rise to 7.9% for offices outside of the South East, 7.9% for industrials, and 7.0% for retail units.
Phil Tily, IPD Managing Director for the UK and Ireland, said:
“It may seem like insignificant growth, but this is an important milestone for the UK property market. After the double dip recession and a fall in values of over 37%, UK property has finally, painstakingly, clawed itself back to growth.
“Admittedly, we cannot overlook the task ahead of the sector, for much like with the wider economy, it remains a long road to recovery, but while it will be an uphill struggle, at least, after six very long years, there are again signs of improvements.”