Strong Q4 for commercial property saw total returns of 19.9% in 2021 – Cluttons IM

The latest Quarterly Examiner research from Cluttons Investment Management (IM) reported total returns in line with the MSCI Monthly Index of almost 20% in 2021, up from 13.4% in 2020 and above the industry predictions which varied between 10-14% thanks to a ‘spectacularly strong’ Q4 for commercial property.

Investment volumes in 2021 rose 9% and reached 10% above the long-term average. Q4 returns alone rising from 4.6% to 7.9%, the strongest quarterly performance since Q4 2009, when the industry started to bounce back following the Great Financial Crisis (GFC).

The strategic property advisor said that Q4 performance was bolstered by West End and Midtown offices as well as industrials and retail warehouses, in a sign that Omicron and Plan B restrictions including the latest ‘working from home guidance’ had little impact on confidence in central offices as an asset class.

Jamie McCombe, head of Cluttons IM said, “Despite the ongoing pandemic, inflationary pressures and Brexit, 2021 saw a solid performance in commercial real estate with investment volumes up, returns well up on expectations and yields hardening. Property funds are open again, assets under management have risen and while lending remains muted, transactions are increasing. On the rental side, June 2021 saw the bottom of the cycle for all property rental values and we expect recovery to pre-pandemic levels by Q2 2022 while capital values have already recovered and will continue to rise in the foreseeable future. We think this year will see further inflationary pressures with perhaps four rises in the Bank Rate of 0.25%, ending the year on 1.25%. For property returns themselves, we expect another strong year with over 10% returns for all property.”

Property yields saw a further hardening by 25 basis points while gilts saw the opposite, with the Initial Property Yield vs gilt gap at 3.5% currently.

UK REIT share prices grew by 26% in 2021 and outperformed the wider ‘all share’ market indices with the top performers of the year all being focussed on logistics and warehousing.

The research did caveat that unexpectedly strong performance from West End and Midtown offices in Q4 is likely to prove a one-off correction given the uncertain post-Covid outlook for offices. Property equivalent yields hardened by 31 bps and contributed a 5.4% uplift to valuations. All Property rental value growth increased to 1.5% in Q4 from 0.6% in Q3. Q4 income returns amounted to 1.2%. Over the course of the fourth quarter, office rental values increased by 0.6% while industrial rental value growth increased to 4.0% from 1.8% in Q3. However, with the exception of retail warehousing, rental values in all retail segments fell further.