Growth in demand for London office space props up UK office market

Two years of positive UK growth tails off to a whisper as retail sector continues to decline

Article posted: 18 Aug 2011

The long drawn out decline in capital growth fell again in July, to its lowest rate since the recovery began, according to the IPD UK Monthly Index. Despite the UK market now seeing two full years of positive growth, declines in retail values leave offices as the only sector experiencing capital appreciation.

“With a 0.1% improvement in capital values this month, the balance between the performance of prime assets and the more challenged secondary markets remains finely poised,” said Phil Tily, UK and Ireland Managing Director.

“Challenges within the wider economy have put further pressure on the market. The declines in the retail sector being a case in point. Consumer spending falls are impacting on occupier demand and while retail yields remained steady, a -0.2% drop in rental values has prompted a -0.1% decline in retail valuations for July. The capital depreciation seen amongst unit shops in the rest of the UK has this month spread over to outer London and the rest of the South East.”

Meanwhile the overall office market has remained positive due to the continued strong capital growth of office space in London.

Tily observed “While the Euro-zone crisis and the American downgrading has led to a lot of talk regarding the UK as a ‘safe haven’, the slowdown in the UK economy has limited levels of growth in this month’s results.

“That said, while yields on Government bonds remain low and with further uncertainty in the equities markets, property continues to hold its own against other asset classes. Yields at an all property level are 6.3%, delivering an income return of 0.5% for the month.”

24 consecutive months of positive capital growth has seen values recover by 17.6%. On a twelve month rolling annual basis, capital growth has slowed to just 1.9%.

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Posted by Sara