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Property

September 2010

Growth in the UK commercial property market showed signs of grinding to a halt during August. Real estate posted a total return of just 0.8%, with capital values rising only 0.2% in July – down from 0.5% in June and May. So far, the market has produced 12 consecutive months of positive growth, culminating in a 15.4% rise since last August. The retail sector has benefited most from the rising prices, with an 18.6% rebound over the last year, followed by offices at 13.8% and industrials at 10.8%.

Rental value growth was also unremarkable over the month at -0.05%, with retail the weakest sector at -0.23%. This is not surprising given consumer concerns about the prospects of economic growth, higher taxes and job cuts in the public sector. On a more optimistic note, industrials edged into positive territory, at 0.15%, for the first time since the downturn in rents began. Offices continue to see rental growth in central London, but outwith the capital they are still in the rough. As the regions are likely to suffer more from the impending public- sector cuts, regional rents are not likely to make a rebound any time soon. As such, we expect that solid growth, in all sectors of the market, will be pushed back at least until mid-2012.

Although the prospects for an ongoing recovery in the market seem to be less than optimistic at the moment, the long-term outlook for real estate remains encouraging. From August 2010, we expect UK property to deliver an average annual total return of 5.5% over three years, and 7.8% over five years. And with yields currently at around 6.5%, the asset class continues to attract investors – especially in the absence of other high-yielding alternatives

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Scottish Widows Investment Partnership Limited (SWIP) is registered in England and Wales, Company No. 794936. Registered Office is at 33 Old Broad Street, London EC2N 1HZ. Tel: 0131 655 8500. SWIP is authorised and regulated by the Financial Services Authority and is entered on their register under number 193707 (www.fsa.gov.uk).