The UK commercial property market had slowed markedly by mid-2007. Total returns for the year to end-June 2007 were 12.4%, slipping from 18.1% at end Dec-2006 and were substantially lower than the 21.6% for the year to end-June 2006. However, commercial property still remains the best performing asset class over the medium to long-term. Offices continue to offer the highest total returns, followed by industrial and retail respectively.
Strong investor confidence has continued to underpin the commercial property market through the first half of 2007, predominantly concentrated around Central London offices, with an estimated £27bn invested in UK commercial property, overseas investors being the most active. Successive interest rate rises have recently begun to impact on investment levels, with a fall in the number of commercial property transactions taking place.
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For the second half of 2007 and for 2008, we expect rental value growth to take over from yield compression as the principal driver of returns. Currently rental value growth stands at 4% a year, up from 3% a year in 2006. However, this growth varies between different segments of the market. Offices continue to experience the greatest increases, whilst growth is largely flat for industrials. Retail rental value growth is still slipping.
Property Total Returns
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Investment Yields
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