Capital values fell by another -0.2% in January as the New Year brought little good news for the UK property market. Total return fell to 0.4%, its lowest since June 2009, according to the IPD UK Monthly Index.
Phil Tily, Managing Director of the UK and Ireland, explained, "Rental values fell back into decline in January, albeit slightly, and they have now been negative for three out of the last four months. Yields saw slight expansion, but fragile occupier demand remains the main driver behind falling capital values."
"With so much uncertainty still surrounding the future of the UK and the Eurozone, and reports indicating that the UK economy is falling back into recession, it's no surprise that demand from tenants remains lackluster across all sectors. The recent quantitative easing announcement by the Bank of England shows just how hard the authorities are trying to increase spending."
Rental values in the office sector ceased to benefit from strong growth in London, and declined for the first time since October 2010. City offices suffered a rental fall of -0.1%, while growth in rents in outer London slowed to just 0.1%. Even the West End
and Mid Town, which have benefitted from tight supply and strong demand, saw rental growth slow to zero.
Tily continued, "The City has been an area of strong growth since the recession, with values recovering by almost 35%. However, in the last few months there has been increasing anxiety surrounding the sector in December, values declined amidst softening yields and the subsequent rent declines in January vindicated that investor-led trend. Essentially, investors have begun to question the City's ability to maintain rental growth in the short term, putting current yield levels under sharp scrutiny."
Fading demand continued to impact on capital values in the retail sector - where Central London and retail warehouses were the only areas to record positive growth. Shopping centres continued to be one of the hardest hit sectors, London and the South saw declines of -0.5%, while those in the rest of the country fell by -0.7%.
Retail rental values told a similar story, falling almost universally for standard retail units across the country, the exception being Central London. Even retail warehouses in London and the South East saw a drop off in rents, of -0.1% apiece.
"All this paints a fairly somber picture for the start of the year," concluded Tily, "but there are areas for optimism. Income return remained steady, 0.5% at the all property level, and it remains important to remember that in a very uncertain market, commercial property is still returning 0.4% to investors."