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IPE special report May 2018

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UK property returns rise 3% in 2002

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UK – New figures show that UK commercial property returns rose 3% in 2002 to 9.7% - fueled in part by institutions seeking a safe alternative to equities.

“According to the IPD results, all property total returns improved by 3%, from 6.7% in 2001, to 9.7%,” said IPD, or Investment Property Databank. “The results show that property has been the best performing UK asset over the last three, five and 10 years.”

Total returns in real terms were relatively high by historical standards at 6.6%, it said. Total returns improved despite a marginal fall in rental values. Rental values fell by –0.9% in 2002, at the all-property level.

“Paradoxically, yields moved favourably, reflecting strong investment interest from institutions seeking a safe alternative to equities and from debt-backed investors taking advantage of low interest rates,” IPD said.

The all property equivalent yield fell by 0.25 percentage points last year to 7.6%, adding 3.3% to capital growth and returns.

Retail returns grew to 14.1% from 5.5% in 2001. Industrial returns rose by 2.5 percentage points to 10.8%. Office total returns halved to 3.3%, from 7.6%

IPD research director Mark Callender said: “Although last year’s total return was close to the long-term average, 2002 was highly unusual in that property yields moved favourably, despite a significant deterioration in rental growth.

“This apparent paradox reflects the current low inflation environment and the fact that unlike in previous downturns, geared investors have not been shut out of the market by prohibitively high interest rates”.

At the end of 2002, the 232 portfolios and 11,400 properties covered by the Annual Index were valued at 102 billion pounds – the equivalent to 75% of the total property assets of UK institutions and listed property companies.

The returns compared favourably with other asset classes. Equities retuned –22.3% in 2002, UK government bonds made a 9.8% return while cash returned 4.1%, IPD said.

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