An attribution of the return on the UK commercial property market

Between 1981 and 1994, the UK commercial property market (IPD) delivered a total return of 9.9 per cent each year, 4.2 per cent each year in real terms. Over the same period, the real return on UK equities and UK gilts was 11.6 per cent and 6.9 per cent respectively, it is important to account for the poor performance of property. Other than a model which attributes performance to income return and capital return, there are few models that attempt to account for this. This model is simply descriptive. The responsiveness of the return on commercial property to inflation is crucial to pension funds, the liabilities of which are often wage‐linked. Establishes auto‐regressive expectations of real ERV growth and inflation. Presents a model of the simulated lease structure of the IPD. States the main cause of the under‐performance was the increase in the required return on property over the period. Between 1980 and 1994, long‐term expectations of inflation fell. Concludes by stating the existence of over‐rented properties, after the decline in rents in the early 1990s, had a large impact on he relative influence of inflation and real ERV growth. Over‐renting increases the impact of unexpected inflation and changes in expected inflation and reduces the impact of unexpected real ERV growth and changes in expected real ERV growth. In fact, the impact of unexpected inflation in an over‐rented environment is bigger than the impact of unexpected real ERV growth.