UK Commercial Property posts best returns since 1993 (UK)

UK commercial property investors enjoyed a year of stellar returns in 2005, with the IPD all property index released earlier today - posting its biggest gain since 1993.

The all property total return in 2005 was 19.1%. Equities were the best-performing asset class last year, delivering returns of 22.0%. Equities now also lead over three years but property is the best-performing UK asset over five and ten years. Property shares outperformed their physical and non-listed peers in 2005 with returns of 23.3%. At the sector level, office returns, at 20.4%, outpaced both retails and industrials for the first time since 2001. The Central London office market was particularly strong, as the recovery in the occupier market continued to strengthen. Industrial returns rose from 16.9% in 2004 to 18.4% in 2005, while retail returns, last years star performer, slipped from 20.5% in 2004 to 18.8% last year. Accordingly, the spread of returns between the sectors narrowed to 2.0% in 2005, from 5.3% in 2004, as yields in all sectors were driven down by the weight of money chasing a limited supply of property.

Table 1 UK Property Performance, 2005

The all property yield finished 2005 at 6.0%, the lowest level ever recorded by IPD and just under 2% higher than that on 15 year gilt yields. Historically, a 2% buffer has been seen as a reasonable risk premium for

property, which may imply that property yields will become increasingly susceptible to interest rate rises in 2006 and beyond. Any such rise in rates would almost certainly produce a knock-on effect on property yields, and total returns on property would be adversely affected.

Ian Cullen, IPDs co-founding director said: "A fourth unprecedented year of accelerated yield compression, in the context of rental growth which still no more than matches inflation, leaves the market vulnerable to anything which may threaten such a fragile yield equilibrium interest rate rises, any switching in international capital flows, non-economic shocks"

Source: IPD

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