Trends in UK Commercial Property Returns
The all property IPD Monthly Index, which encompasses office, retail and industrial, indicates that in June 2009 commercial property values fell 0.9% (representing a 10% annual drop assuming monthly compounding), the smallest fall since August 2007. In the previous month commercial property values fell 1.6% (representing an 18% annual drop). The all property peak-to-trough drop in commercial property capital values in June 2009 stood at -44.1%.
Retail posted the best monthly performance as the 0.7% fall in capital values was neutralized by a 0.7% income return thus resulting in a total return of 0%. Industrial posted a negative total return of -0.1% (representing an annual return of -1.2%) driven by a 0.8% fall in capital values (representing a 9.2%annual drop).
All property types registered a deceleration of the rate of capital value declines compared to the previous month. The property type that registered the largest "improvement" was retail as the monthly rate of decline dropped from -1.6% in May 2009 to -0.7% in June.
According to IPD, between June 2007 and June 2009, yields for UK commercial property have moved out 330 basis points, from 4.6% to 7.9%, while the rent cycle has been deepening especially in the first six months of 2009 due to rising office vacancies in the City and West End. Particularly, IPD reports that rental values have dropped 0.9% in June 2009.
Vacancy rates, which represent in the IPD Monthly Index databank void rental income as a percentage of the aggregate income of a property, have increased from 8.2% in June 2007 to 12.1% in June 2009, for all UK commercial property.
As conclusion from the analysis of the numbers reported by IPD for June 2009, we note the "improvement" of total returns in all property types and the slowing down of capital value declines compared to the previous month.
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