Total returns for UK commercial real estate assets stood at zero per cent in May, posting a 0.5 per cent decline from the previous month. According to the latest IPD UK Monthly Property Index, falling capital values were behind the decline, while there was no movement in income return, which held steady at 0.5 per cent. However, the organisation stated this was no longer enough to offset sliding capital values.
Although the picture for the UK as a whole is not overly rosy, the London property investment market remains buoyant. Managing director of IPD UK and Ireland Phil Tily commented: "Despite the uncertainty caused by wider economic factors, or perhaps because of it, returns in London continue to be resilient. Values in the City and West End office markets grew by 0.9 per cent and 0.3 per cent respectively." In its Market in Minutes report for April, Savills predicted investment volumes in UK commercial real estate would be lower in the second quarter of the year, compared to the three months from January to March, due to declining capital values.
Savills cited rental predictions from the Investment Property Forum, which expect offices to outperform other real estate classes over the coming two and a half years, with West End offices delivering consistently high returns into 2014. Rents for City offices, which are currently well below their West End counterparts, will rise, closing this gap in around two years. However, Ed Stansfield, chief property economist at Capital Economics, recently suggested developers may have been "slightly overoptimistic" in estimating demand for office space in London and as a result, new supply entering the market could push rents back a bit. He stressed this will not happen in the immediate future, but advised it is a possibility in the next two years as new schemes are completed.