UK Returns Fall Short of 20%

LONDON-UK commercial property returns for 2006 are expected to fall just short of 20%, Investment Property Databank predicts. The office sector also continues to lead the market.

The third quarter return of 3.8%, which was a slowdown on the 4.8% return in Q2, means that the 12-month rate currently remains above 20%, at 20.6% to be specific, and outstrips returns from UK equities and bonds, which earned investors 14.2% and 2.5% respectively. A return of 5.5% in the final quarter is required to keep returns above 20% for 2006.

“Strong returns in the first half of 2006 pointed toward a return of more than 20% from commercial property for the calendar year as a whole,” IPD research director Malcolm Frodsham says. “But the Q3 total return has now perhaps put that figure just out of reach.”

The income return in the third quarter remained at 1.2%, but there was a slowdown in the rate of capital growth to 2.6% as the pace at which yields are falling slackened. Offices remain the leading sector, with a 4.6% return in the third quarter, but the sector only narrowly outperformed industrial’s 4.4%. This is now the fourth successive quarter in which offices have topped the sector hierarchy and the second with retail relegated to last place.