Investment grade market let residential property delivered an 11.0% annual total returns last year, according to the IPD UK Residential Index, representing a three-fold outperformance of the commercial property market. The double-digit 2009 UK residential total return comprised of an 8.1% capital growth and a 2.7% income return is the third consecutive year in which the market has outperformed the broader commercial sector, delegates at the IPD UK 2009 Residential Index Launch were told.
Speaking at the breakfast index launch held at the Society of Medicine in central London Mark Weedon, Head of UK Residential Services at IPD, told delegates: "2009 has seen a strong recovery by residential market let property. London and the South East enjoyed the greatest recovery with central London setting the pace. At the other end of the spectrum, the North and Scotland lagged the market, delivering negative returns for a second successive year. Indeed in Scotland performance worsened year-on-year."
Central London experienced the lowest income return and dragged down the overall market net yield with most other regions faring much better, the South East, South West, Midlands and Wales realised income returns close to 5%.
Weedon added that one of the unique features of residential returns was the correlation between risk and return. "Usually, high risk is associated with higher returns and vice versa. But in the residential sector the evidence points to the contrary; residential investment has significantly lower standard deviation (a measure of risk) compared to the commercial market, with higher returns."
On an annualsied inflation-adjusted total returns basis, the residential sector outperformed the commercial market over three, five and nine years (back to the launch of the index in 2001).
Weedon concluded: "Residential market let investment has consistently rewarded investors with greater returns than commercial property and other asset classes since 2000 despite lower income returns. Long-term performance represents a hedge against inflation and volatility whilst maintaining impressive performance relative to other sectors."
Conference chairman Ian Cullen, co-founding director of IPD, added that the UK return is the second highest residential total return so far reported for 2009, behind Sweden's 13.9%.
Q&A session
Following Weedon's presentation, Rob Weaver, Head of Residential Invista Real Estate Investment Managment, told delegates: "The results confirm something we all know and cannot now hide away from residential property has outperformed commercial property over the short, medium and long term. It has had the greatest performance for the lowest risk and you can't get away from that fact."
Hugh Seaborn, Chief Executive at Cadogan Estates, said: "Residential has clearly delivered a lot better returns than commercial property over the decade. The market has been helped by scarcity of supply, while an influx of wealthy overseas investors has helped smooth volatility."
Philip Littlehales, Investment Director at Terrace Hill Group agreed and added: "There is a massive tension between demand and supply in the sector and these dynamics have not changed throughout the 'noughties'. As a result, residential property ticks a lot of boxes for investment over the next decade as well."
Cullen then put a delegate's question to the panellists: "Why is that despite the outperformance of the sector, relative to the commercial market, over the short, medium and long term, that there is not more mainstream institutional interest in the residential investment?"
The panellists argued a combination of scale in the market, supply and demand restrictions, access to product, perceived low income returns, regulatory uncertainty and a lack of market understanding are all considered hurdles to overcome.
Allan Collett, Chairman, Allsop Residential Investment Management, said: "The commercial market is today unrecognisable from the 1980s; average lease lengths have come down from 25
