The MSCI/IPD Quarterly UK index tracks predominately commercial real estate investment but residential investment is included too. The Index covers 9,000 property investments across the UK with a total value of £150 billion. The average property size is therefore around £16 million.
The index is intended for large scale institutional investors – pension funds and the like – but the themes emerging from these latest results are interesting for all property investors.
Their headline ‘All Property’ total return for 2016 was 3.5%. This is significantly lower than the total return in the year before (13.1% over 2015) as a more uncertain economic outlook and the impact of Brexit affected performance. Total returns track the combined result of any price improvement / decline (capital growth) and the income return element of the investment.
There was considerable variation in sector performance last year. The good news for residential is that its 2016 performance was strong, in fact, it was the top performing sector with a total return of 8.3%.
The next best performing sector was the industrial market – which includes distribution warehouses – a strong performer in the era of Amazon and online shopping.
The Brexit vote weighed most heavily on office market performance. Immediately after the referendum, values were re-rated in response to concerns for the future of the Central London office market. The threat that some financial service companies could relocate to other European cities was enough to cause a fall in values.
The retail sector – which includes high street shops, shopping centres, retail warehouse parks and supermarkets – produced the weakest performance (total return of just 1.7% over 2016). This sector has been dented by the growth of online shopping. To perform well, retail investments now need to offer other attributes – for instance to be alongside leisure facilities, a vibrant town centre or convenience shopping.
The MSCI/IPD figures also prove the importance of stock selection – it is not often enough to be in the right sector or location – the choice of individual property investment is paramount.
The allocation to residential within these large scale investment portfolios is currently small (only 2.2%) but it is good to see residential performance tracked on a like for like basis with other types of property and come out on top.
Long may residential reign supreme!