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New research from Cluttons Investment Management shows total returns remained in line with the MSCI Monthly Index of nearly 20% in 2021, up from 13.4% in 2020 and ahead of industry forecasts, which varied between 10% and 14%.
The investment volume increased by 9% in 2021 and was 10% above the long-term average. Q4 returns alone rose to 7.9% from 4.6%, the strongest quarterly performance since Q4 2009, when the industry began to recover from the Great Financial Crisis (GFC).
The strategic real estate adviser said fourth-quarter performance was supported by West End and Midtown offices and industrial and retail warehouses in a sign that Omicron and Plan B restrictions, including the latest work-from-home guidance, are easing out, had little impact on confidence in central offices as an asset class.
Jamie McCombe, head of Clutton’s IM, said: “Despite the ongoing pandemic, inflationary pressures and Brexit, 2021 has been a solid trajectory for commercial real estate with rising investment volumes, yields well above expectations and hardened yields.
“Real estate funds have reopened, assets under management have risen and while lending remains subdued, transactions are picking up. On the rental side, June 2021 was the bottom of the cycle for all property rental values and we expect a recovery to pre-pandemic Q2 2022 levels, while capital values have already recovered and will continue to rise for the foreseeable future.
“We believe this year will see further inflationary pressures, with maybe four 0.25% bank rate hikes ending the year at 1.25%. For property returns themselves, we expect another strong year with returns in excess of 10% for all properties.”
Property yields continued to harden by 25 basis points while gilts experienced the opposite, with the initial property yield vs. gilts currently gaping at 3.5%.
UK REIT share prices are up 26% in 2021, outperforming broader all-share market indices, with the year’s top performers all focused on logistics and warehousing.
The study qualified that the stronger-than-expected performance of the West End and Midtown offices in the fourth quarter is likely to represent a one-off correction amid the uncertain post-Covid office outlook. Home equivalent yields firmed 31bps, helping valuations rise 5.4%.
Rental value growth for all properties increased from 0.6% in Q3 to 1.5% in Q4. Q4 earnings returns were 1.2%. During the fourth quarter, office rentals increased by 0.6%, while industrial rentals growth rose to 4.0% from 1.8% in the third quarter. However, with the exception of retail warehouse, rental values have continued to fall in all retail segments.
