Over the first six months of last year initial yields across all three sectors continued to expand, albeit at a slower pace, which together with a recession-led weakening in rental levels caused capital growth to continue to fall. Incrementally over the first half of last year yield pressure softened as rental growth weakened.
At the start of the second half of 2009, the key driver of capital growth flipped with yield impact, which measures the influence yield movements have on capital values, turning positive. A subsequent easing in rental pressure was sufficient to produce the first positive monthly capital growth figure in August – at a modest 0.2%. The month-on-month yield compression then led to a rapid turnaround in fortunes, although December’s rental value growth was marginally weaker than the previous month, at -0.4%.
At the sector level, the most recession-sensitive sector, Offices, began its recovery latest. After a capital growth decline of -14.0% over the first eight months of the year, the Office sector staged a recovery from September to the end of year, at 6.4% to end 2009 at -8.4%. In the Retail sector, over the first six months of 2009 capital growth fell by an identical amount, at -14.0%, but returned to positive capital growth in July delivering 11.3% to December to end the year at -4.3%.
The Industrial sector’s initial capital depreciation last year was the shallowest, at -11.0% over the seven months to July, before a compounded 7.3% capital growth over the final five months to end the year at -4.5%, marginally worse than the Retail sector.
From the start of the early decade property market rally in January 2002, unbroken monthly capital growth over five an half years to July 2007 saw values rise by 52.9%, followed by a 25-month peak-to-trough to July 2009 in which markets fall by 44.2%. At the tail-end of the decade, the reversal of market fortunes was such that quarterly capital growth over the three months to December 2009 was the largest on the Monthly Index records, at 7.4%.
Over the decade, compounded nominal total returns were 81.5%, driven entirely by income returns of 90.5% while capital growth declined by -4.8%. On an annualised basis total returns, capital growth and income returns were 6.1%, -0.5% and 6.7%, respectively.
UK commercial property annual investment returns, at 2.2%, outperformed the bond markets, which fell by -0.3% but significantly underperformed against the recovery in wider equity markets, which delivered 30.1%.
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