The property investment sector – 2016 review
We will look back at 2016 as one of the most unpredictable years of recent times, dominated by the UK's unexpected decision to leave the EU and the US electorate's decision to elect Donald Trump as the 45th president of the United States. What happened in the UK commercial property market was equally as eventful.
Published on 28 Jan 20173 minute read
Property – overall performance in 2016
The IPD monthly index All Property (a recognised UK commercial property benchmark that excludes the impact of transaction costs and other fees) delivered a total return for 2016 of +2.6%, comprising an income return of 5.6%, offset by -2.8% capital value declines*. There was wide divergence in the underlying sector performance, with capital value declines dragging down returns in all but two UK property sub-sectors: South East Industrials and South East Retail. The broader retail sector experienced the lowest total return (+0.3%), followed by offices (+1.8%), while industrial property made a major contribution to overall averages in 2016 with a +7.2% total return.
Mid-2016 was dominated by the EU referendum
2016 began with the additional 1% stamp duty negatively impacting valuations, followed by two quarters dominated by the EU referendum. Transactions stalled in the run up to the Brexit vote, followed by six weeks of uncertainty as liquidity concerns increased and the retail funds experienced significant outflows. Many London Stock Exchange listed REITs experienced sharp falls in prices, to trade at a significant discount to their prevailing net asset values. In particular, those listed REITs with a focus on the City of London, high retail exposure, short lease profiles, development portfolios and/or higher levels of gearing found themselves under more severe price pressure. Within the UK bricks and mortar fund universe, many popular retail funds suspended trading, essentially gating existing investors.
Is the property sector out of the woods yet?
Following a difficult summer, the UK property market stabilised through the autumn, with pockets of capital growth becoming more evident across sectors such as industrials, while retail UK bricks and mortar funds that had suspended trading re-opened for dealing. The UK economy has also surprised many by maintaining its positive momentum, however, while the broader UK commercial property market is expected to be relatively benign through 2017, a great deal of uncertainty still overhangs the asset class – particularly across those sectors more at risk from the EU referendum result.
That said, low supplies of quality stock combined with investor demand have ensured competitive bidding for some assets. While transaction volumes have not yet returned to normal levels, there has been sufficient investment activity to generate transactional evidence for valuers. Core UK assets in particular have been in strong demand from opportunistic overseas investors, as they search for yield and stable income streams and seek to take advantage of a weaker sterling. Our expectation is that 2017 will be a year of modest returns, which are likely to be dominated by income returns.
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. The property market can be illiquid; consequently, there can be times when investors will be unable to sell their holdings. Property valuations are subjective and a matter of judgement. This is not advice to invest.
*Figures may not be exact due to rounding.