IPD: UK residential returns sustain double-digit returns (UK)

Investment grade, market let residential property delivered a second consecutive double-digit annual return in 2010, at 10.4%, according to the IPD UK Residential Index.

The investment performance comprised of 7.4% capital growth and 2.8% income returns, driven by a 7.6% rental growth, positive for nine out of the last 10 years, with modest yield compression.

Residential property underperformed the commercial market for the first time in four years across the index's now 10-year history, reflecting the main market's rapid recovery last year from precipitous re-pricing over 2008 and 2009. UK commercial property delivered a 15.1% total return in 2010, according to the IPD UK Annual Index.

Over the long-term, however, residential returns underline more consistent credentials, with three-year annualized returns of 1.3%, compared to -2.5% for commercial. Over five and 10 years, residential returns were 7.4% and 10.1%, while commercial returns were 0.9% and 6.7%, respectively. Bond and equity returns followed behind property over 10 years with annualized returns of 5.9% and 3.7% respectively.

Speaking at the IPD UK Residential Annual Launch, held at central London's One Moorgate Place, Mark Weedon, Head of UK Residential Services at IPD, told delegates: "Residential performance continues to deliver high returns with low volatility."

The headline annual total return masked variation across the regions – with a significant 19.5 percentage points spread between best and worst parts of the market.

Weedon explained: "Central London was the top performer, at 13.1%, comprised of 10.7% capital growth and a 2.1% income return. The further away from the capital, the steeper the performance deterioration. Inner London and Outer London returned 11.4% and 7.9%, respectively, after which, performance falls quite heavily culminating in the worst region, the combined North of England and Scotland, which delivered negative returns of -6.4%, driven by a -9.7% capital depreciation."

The role of income was more dominant the greater the distance from London; Outer London, the South East, South West and Midlands all delivered income returns of more than 4%. Weedon said: "This reflects a different kind of investment market, with not necessarily such low yielding, low income characteristics as in central London".

The 10th IPD UK Residential Index also reveals that residential property outperformed all other main asset classes. Weedon explained: "It's very much the message that on average residential, market let, modern lease type stock outperformed most main asset classes over this 10-year period. With returns of over 10%, year-on-year, none of the major asset classes come close."

The IPD UK Residential Index is sponsored by Allsopp, CBRE, Cluttons, CMS Cameron McKenna, DTZ, King Sturge, Savills and Young Group.

Following Weedon's market presentation, Trevor Moross, Managing Director, Dorrington said: "There is so much potential in the residential market – deals of scale are there to be done. Large London regeneration schemes offer once-in-a-lifetime opportunities for investment at scale, such as in Earls Court, Kings Cross, Greenwich and, dare I say it, the Athletes Village. Some of the large property companies – Land Securities, Capital & Counties and British Land – are all pushing into development and forming residential teams as they have realized the opportunity."

On the subsequent panel, consisting of Alan Collett, Chairman of ARIM Investors, Alan Patterson, Head of European Research and Strategy at AXA REIM and Neil Young, CEO at Young Group, Patterson said: "For the last 10 years residential performance really has been very good, during the downturn the sector showed great resilience. Even though people suffered from negative equity, they could maintain their owner-occupied homes and there was not a lot of distressed property coming onto the market."

Collett added: "The house-building industry is struggling; it's operating at 60% of pre-crash capacity and delivers half of what the government

Related News