IPD UK annual results

IPD UK annual results

Property best performing asset over last three yearsKeywords:Property investment, Commercial properties, Offices, Refurbishment

Investment Property Databank recently released its annual performance figures for 2000. The figures are based on the analysis of 13,260 properties, valued at£97.4 billion. The IPD universe currently covers 230 separate UK portfolios – equivalent to three-quarters of the property assets of the institutions and quoted property companies.

Market returns

Commercial property produced a solid, if unspectacular performance in 2000. Standing investment properties achieved a total return of 10.4 per cent, the fifth consecutive year of double-digit returns and exactly in line with the long-term average since 1980.

Rental growth accelerated to 7.1 per cent last year, from 5.9 per cent in 1999, as strong economic growth boosted the demand for space. The increase left average rental values on a par with their previous peak at the end of 1990 and to a level 36 per cent above the trough of 1994.

Capital values rose by 3.5 per cent in 2000, half the increase in rental values. While part of the difference was due to over-renting, limiting the immediate impact of rental growth on capital values, the main factor holding back capital growth was an upturn in yields. Whereas the all property equivalent yield fell in 1999, adding to capital growth, last year it edged up by 0.13 points, reflecting a new nervousness among investors about the outlook for future rental growth, particularly in the retail sector. This increase in yields knocked 2 per cent off capital growth and accounted for the four point decline in total returns from 14.5 per cent in 1999.

Returns by sector

Most of last year's decline in all property performance was due to retails. Total returns on retails fell sharply to 6.6 per cent in 2000, from 14.1 per cent in 1999. Retails suffered the largest rise in yields – of 0.2 percentage points – cutting capital growth by around 3 per cent. ln addition, the sector was alone in seeing a slowdown in rental growth in 2000, as the increase in retail rental values eased to 4.1 per cent, from 5.6 per cent in 1999.

Offices fared better, as total returns rose to 15.5 per cent in 2000, from 14.1 per cent in the previous year. The improvement reflected a near doubling in the rate of rental growth to 12.8 per cent. While office equivalent yields edged up by 0.11 percentage points last year, the negative impact on capital values of– 1.4 per cent was smaller than in the retail sector.

Industrials slipped into second place as returns eased to 13.8 per cent, down four points on 1999. The decline in returns reflected a less favourable trend in yields, as the fall in the industrial equivalent yield moderated to 0.20 percentage points in 2000, from 0.47 points in the previous year. Industrial rental growth held steady at 4.5 per cent through last year.

The divergence in retail and office returns meant that nine percentage points separated the best and worst performing sectors in 2000, the biggest range since 1992. The spread averaged just three percentage points through the second half of the 1990s. One consequence of the wider range in returns is that fund structure re-emerged as an important influence on fund returns in 2000, having been over-shadowed by stock selection through most of the 1990s.

Market segment performance

Retails

Last year's deterioration in retail performance was primarily a town centre phenomenon as shop and shopping centre returns fell sharply to 3.5 per cent and 6.2 per cent, respectively. While retail warehouse performance also weakened,the drop in returns to 11.3 per cent was limited to three points on 1999 and the segment outperfomed the all property average.

The main factor which set retail warehouses apart was a slight acceleration in rental growth to 6.6 per cent, from 5.6 per cent in 1999. By contrast, shop rental growth slowed two points to 4.1 per cent and shopping-centre rental growth more than halved to 2.5 per cent. In addition, retail warehouses largely avoided the damaging rise in yields seen on other retail types in 2000-shop and shopping centre equivalent yield rose by 0.4 and 0.1 points, respectively.

Offices

The acceleration in office rental growth in 2000 reflected a revival in the core markets of Central London. Office rental values in Mid-Town and the West End rose by 20-22 per cent, overtaking rental growth in fringe locations (19.0 per cent) and rental growth in the City quickened to 16.5 per cent, from 5.4 per cent in 1999. While all three core markets saw a rise in yields, the negative impact was limited and total returns ranged from 15.3 per cent in the City to 22.9 per cent in Mid-Town.

Outside London, the best performing office markets were the South East, South West and Eastern, where rental growth of 5-7 per cent left total returns running at 12-14 per cent. The other relatively strong market was Scotland, where an 8 per cent increase in rental values resulted in total returns of 12.3 per cent. Across the rest of the UK, modest rental growth of 1-4 per cent limited office returns to 7-10 per cent.

Industrials

Standard industrials once again displayed a clear north-south divide in performance in 2000, with returns ranging from 17.8 per cent in London, to 11.3 per cent in northern England. The divide echoed regional variations in rental growth and a larger fall in yields in the south. Distribution warehouses under-performed standard sheds with total returns of 11.7 per cent.

Property and other assets

Last year saw property prove its worth as a diversifier of risk in multi-asset portfolios. Total returns on equities dropped to –5.9 per cent in 2000, as high-tech stocks slumped and fears of recession grew. Gilts,conversely, gained from the prospect of a US recession and lower world inflation and total returns recovered to 9.2 per cent.

As a result of last year's downturn in equity markets, property is now the best performing asset over both one year and three years – returns on property, equities and gilts averaged 12.2 per cent, 9.8 per cent and 9.6 per cent per year, respectively, over the three years to end 2000.

Investment activity

Overall, net investment rose to £5.7 billion in 2000, a new record in cash terms. In relative terms, last year's net inflow was equal to 6 per cent of mid-year capital value, almost double the rate seen in 1999, but below the recent peak of 7 per cent set in 1998. The increase in net investment from 1999 reflected both a 21 per cent rise in purchases to £10.1 billion and a 9 per cent drop in sales to £7.7 billion. Capital expenditure on development and refurbishment schemes was unchanged at £3.3 billion.

In keeping with their relative performance, last year saw a major switch in net investment towards offices and away from retails. Offices accounted for 46 per cent of total net investment in 2000, up from 10 per cent in 1999, with most of the new money channelled into outer London and southern England. Conversely,retails' share dropped to 32 per cent of total net investment, from 61 per cent in 1999, as investors sought to cut their exposure to shops and shopping centres. Industrial's share remained stable at 17 per cent of total net investment.

The annual performance results from the Property Investors Digest are now available in spreadsheet format. The complete Digest was published in April and is available on subscription at a cost of £3,750, including the Monthly Index and Quarterly Review.

IPD holds a detailed record of the individual property holdings of financial institutions, including those of all the leading insurance and pension funds. Data is also recorded for a number of limited partnerships, property companies and traditional institutions. The IPD Monthly Index Results are published on the tenth working day of every month.

For Further Information contact: Ian Cullen, Joint Managing Director. Tel:+44 (0) 20 7643 9203; Mark Callender, Head of UK Research. Tel: +44 (0) 20 7643 9238. Claire Herd, Marketing Executive. Tel: +44 (0) 20 7643 9217. Investment Property Databank, 7/8 Greenland Place, Camden Town, London, NW1 0AP. Tel: +44(0) 20 7482 5149; Fax: +44 (0) 20 7267 0208; E-mail: marketing@ipdindex.co.uk