Property returns increase in the UK

LONDON: Property returns in the UK rose to 6.2% in 1Q2010, according to the latest Jones Lang LaSalle (JLL) UK Quarterly Property Index.

Returns were boosted by the 4.5% increase in capital values, which were driven by falling yields across all three major sectors, said JLL.

The office sector achieved the strongest returns of 6.9%. Boosted by strong growth in The City and West End office markets, office capital showed a capital value growth of 5.1%

The retail and industrial sectors registered comparable returns of 6.6% and 4.5%, respectively.

The average rental growth for all property remained at – 0.05% in 1Q2010. However, the office sector posted the first positive quarterly rental growth since March 2008 at 0.18%, reflecting the considerable improvements in rents in The City and West End office markets. The industrial and retail sectors saw declines of – 0.08% and – 0.31%, respectively.

“The occupational market however, remains weak, thus any rental growth over the course of this year will be driven by supply shortages as opposed to strong employment growth. We also wait to see the implication of public sector cuts on office markets, particularly outside of London and the impact on retail properties resulting from how consumer spending will be affected by the expected higher taxes and public sector job cuts post election,” said Mike Penlington, director in JLL’s valuation advisory team.

The discrepancy in investment performance between prime and secondary assets continue to show. JLL’s all property prime weighted yield moved in by 27 basis points to 6% in1Q2010, although the pace of decline has slowed compared with 4Q2009.

“The margin between prime and secondary yields across all major sectors is substantial. Thus given the shortage of prime products, we believe opportunities can be found in the secondary tier of the market, where good-quality, well-let properties can still be picked up at relatively attractive prices,” said Penlington.

With strong returns in the office sector, growth properties have moved ahead of value stocks again. Growth properties posted quarterly returns of 7.4%, while value properties posted 4%.

The difference in capital growth has also widened, 6% for growth stocks compared with 2% for value stocks, said JLL.