Property IQ

Where next for UK real estate?

After 18 months of stellar performance, where next for the UK property market? Despite softer domestic and global economic indicators over the last quarter, total return expectations are still rising, with the more optimistic outlook extending into 2016. 

Investor demand holding firm

The market is performing better than was generally expected. While capital growth was expected to have given way to rental growth as the chief driver of returns, the strength of demand from investors has continued to push yields lower and lengthen this leg of the cycle. Nonetheless, investor sentiment has now eased back across the retail sector.

Prospects remain positive

The 2015 property market has a hard act to follow. Last year, everything fell in place to produce an exceptional performance in a heated investment market. But in fact many of the factors that contributed to that result have not disappeared, and in some cases have even improved.

After a sterling year, what next?

2014 was an outstanding year for UK commercial property. The latest monthly IPD figures show annual total returns have climbed to 20%, a level not seen over the last 20 years. To date, around £46 billion has been invested in the market this year, one of the highest totals ever.

It will be tough for 2015 to match this performance. The consensus view is that returns will roughly halve to a respectable but much less exciting 10% or so. But is this being too pessimistic? 

No summer slowdown this year

Investor sentiment is now positive across the complete range of sub-sectors we monitor each month, and last month saw further compression of prime yields on most types of retail property and multi-let industrial assets.

However secondary property is showing even better returns than prime, and investor demand is narrowing the yield gap between the two.

Rental growth set to boost returns

The second quarter of the year shows the recovery continuation. The drivers of property performance are now gradually starting to rebalance.

Yields are expected to compress further, particularly for regional and secondary property as investors look to these markets for returns.

A positive start to the year

Investor sentiment is positive across the complete range of sub-sectors we monitor each month. Last month saw further compression of prime yields on most types of retail property and multi-let industrial assets.

Consequently, our data shows yields have fallen across the whole range of prime commercial property during 2013, with a mix of sectors enjoying the largest movements.