Real Estate
UK Commercial Property Gains As Economy Improves - Ignis Outlook
The strengthening UK economy is having positive effects on UK commercial property as investor demand and competition for assets drove yield compression throughout 2013, according to Ignis Asset Management.
The strengthening UK economy is having positive effects on UK
commercial property as investor demand and competition for assets
drove yields down throughout 2013, according to a commercial
property outlook from Ignis
Asset Management.
The positive notes come after UK GDP increased by 0.8 per cent over the third quarter of 2013 (ONS figures), as the economy maintained the momentum that has been building up over recent months. The latest PMI surveys also indicate that growth is expected to continue, with the Services PMI in particular getting close to its highest recorded level.
Business and consumer confidence continue to improve and as such, house prices are rising in 2014. In addition, business investment is now expanding as corporations are more confident about future profitability, a crucial requirement for sustained expansion, the firm said.
With the economic improvements, property returns have accelerated due to a significant boost in investor demand. As such, UK commercial property delivered a total return of 2.8 per cent in Q3 2013 according to the IPD Quarterly Index. This was a further improvement on the 1.9 per cent recorded for Q2 2013 and represented the highest level of performance delivered since the last months of 2010. Performance was driven by a combination of income return of 1.4 per cent and capital growth of 1.3 per cent.
“It was the favourable sentiment towards property as an asset class which was the striking feature of performance in Q3 2013. This lifted the performance of the weaker non London/South East/Prime markets by a significant amount. The prime yields quoted by many agents have fallen by a far more substantial degree than the IPD valuations suggesting that the market has moved considerably further and faster than valuations,” the firm said in the analysis.
Conversely, average rental value growth was modest despite improving economics, with a 0.1 per cent growth - a decline in comparison to the second quarter. Central London retails were the top performing market segment over the quarter delivering a total return of 4.7 per cent which translates into a Q1-Q3 2013 figure of 11.3 per cent.
Looking ahead, the firm said that its latest all-property rental value forecast reported a very modest improvement to 1.4 per cent from last quarter’s 1.3 per cent with growth accelerating to 2.5 per cent pa over the period 2014-16.
“We continue to suggest retail warehouses, supermarkets and leisure schemes offer better prospects within the retail sector over the medium term and Central London remains a completely different market. Our latest industrial forecasts suggest that rental values will continue to be flat at 0.2 per cent in 2013 and grow by 1.2 per cent p.a. over 2014-16,” the firm explained.
Looking at total returns in 2013, the firm’s forecast has increased to 10.1 per cent from the 8.3 per cent quoted in September, as optimistic sentiment in the investment market has started translating into physical deals. This trend is expected to continue into 2014 as the rate at which prime and average yields continue to fall accelerates, bringing the year’s returns to 11.5 per cent, Ignis added.
Lastly, the firm noted that the IPF Consensus Forecasts released in November maintain a major improvement for the asset class for 2013 with the average total return figure at 8.6 per cent compared to the 7.0 per cent reported in September. The three-year IPF forecast figure now stands at 8.4 per cent pa, the firm concluded.
