5th January 2015
Experts are gearing up for another stellar run for UK commercial property funds following a very strong year for the asset class.
During 2014, property funds delivered a market beating total return of no less than 13% while the FTSE 100 index edged ahead by just 1% following some heavy volatility over the 12-month period according to data from FE Analytics.
Andy Brunner, investment strategist at Morningstar OBSR anticipates that bricks and mortar is likely to produce double-digit returns again in 2015 as he believes the fundamentals for UK commercial property suggest returns from the asset class could exceed 10% for a third consecutive year in 2015.
He said: “Commercial property offers a very high starting yield, the prospect of solid capital growth and a pickup in rental growth in the year ahead.
“Income is tremendously important to UK commercial property total returns. From 1987 to date, the IPD All Property index has produced a total return of 900% of which income has contributed nearly 80% and capital values just 20%.”
Opportunities from supply constraints
However Brunner asserted that contrary to the perception that London is one large building site, “the reality could not be more different”.
He highlighted that there is very little high-grade property currently available with few developments in the pipeline from 2015 through to 2017.
“The consequence is that rents will continue rising over the next few years given on-going supply constraints,” he added. “Opportunities outside of London persist and we expect further capital value growth in 2015. There is a shortage of high quality prime space in the regions, where the availability of Grade A stock has fallen by nearly 40% over the last four years or so. This shortage should continue through 2015, despite an additional five million square feet of Grade A development coming onto the market over the next several years.”
But the main risk to commercial property comes from its dependency on the health of the UK economy – and the recovery has been instrumental in generating increasingly positive occupier confidence over the past eighteen months.
Brunner said that interest rate increases are also of growing concern, yet, while the Bank of England is expected to raise them in 2015, they may be delayed until the last three months of the year and any increase will be gradual and are likely to have little negative impact for commercial property.
He added: “In contrast, the May general election could create a period of uncertainty, leading to some deferral of purchases by both domestic and overseas investors.
“Overall, the economic environment should remain favourable for commercial property with the asset class supported by high levels of income together with capital value and rental growth. Current forecasts of 9-10% total returns for 2015 could well be revised higher as the year progresses.”