The other property market

1st July 2014

Recent figures show that it is not only residential property that is growing in value.

There has been much debate about whether the residential property market is overheating, with the latest (May) figures from Nationwide showing UK house prices up 0.7% on the month and 11.1% over the last year. Less attention has been paid to UK commercial property, which has also been staging a healthy recovery.

The May numbers from Investment Property Databank (IPD), the leading property analysts, show that the growth in UK commercial property values outpaced the residential market, with a rise in the month of 1.1%, the largest increase this year. IPD says that marks the 13th month of consecutive growth for commercial property values, taking overall capital growth across that period to 8.5%. Equally important from an investment viewpoint is rental income, which added another 0.5% to the property returns in May. Over the 12 months to May 2014, IPD says UK property delivered a total return (income + capital growth) of 16.0%, comfortably ahead of both UK shares and bonds.

Investor demand for UK commercial property remains strong, according to IPD, with interest no longer confined to just London and the South East. Even the retail sector, which has been dogged by corporate failures and stories of empty High Streets, is now enjoying capital growth and rising rents.

Real estate investment trusts (REITs) had a wobble when Mark Carney started talking about interest rate increases in 2014 (see “Interest rate rise speculation”). Nevertheless, the average equivalent yield on commercial property of nearly 7% remains, as IPD says, “attractive for income-focused investors, compared to the pricing of other alternative asset classes.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in property should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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