The UK housing market’s recovery has seen signs of softening in recent months, with figures from the Nationwide house price index showing monthly growth of just 0.5 per cent in October.
This still equates to a 9 per cent rise in prices year on year, but with the residential market appearing to slow on the back of a fall in mortgage applications following stricter rules and concerns about the economic outlook, some investors may be concerned about the future for commercial property.
Latest figures from the IPD UK Monthly Property index show that UK commercial property as a whole delivered a return of 1.7 per cent in September, up from 1.4 per cent the previous month. In addition, the income return measured by the index remained steady at 0.5 per cent.
In terms of sub-sectors, however, UK offices delivered the best return in the month at 1.4 per cent, followed by UK industrials at 1.3 per cent, while retail property lagged behind with a return of just 0.9 per cent.
From an investment perspective, 2014 has had its fair share of challenges, with the start of the year proving difficult to find quality stock, according to Andrew Friend, fund director, property, at Henderson Global Investors.
He explains: “2013 built up quite considerably, but when we hit the first quarter of 2014 there was a lower level of transaction and it was a challenge to buy quality stock. That really took a lot of innovation. A lot of people with capital to invest were looking outside of the normal mainstream sectors to alternatives, such as student housing.
“The private rental sector started to get momentum, as well as the leisure sector, such as gyms and cinemas. That [trend] was driven by better yields in those areas, but also by simply finding better stock.”
As the year has progressed, the level of stock available has increased, but now the challenge is avoiding the poor quality offerings and “sorting the wheat from the chaff”, Mr Friend adds.
The positive macroeconomic environment for the UK so far this year has helped keep property buoyant, with falling unemployment boosting the commercial property market, according to Ian Rees, head of research, Premier multi-asset funds at Premier Asset Management.
He notes: “The twin drivers of robust demand and the constrained supply environment are starting to evidence themselves in some modest rental growth, a key metric for property pricing. As the financing backdrop starts to ease, this is helping buoy transaction levels and is allowing the property market to remain on its path to recovery that commenced in the third quarter of 2013.
“We would expect to see income returns from property remaining robust and the total return to remain attractive. The main danger we would highlight is that too much performance from the asset class over the year ahead is only likely to rob the potential for returns further out.”
Mr Friend agrees that strong performance this year could detract from future years, noting the consensus forecast for 2014 is returns of more than 15 per cent.
