Property Index: Commercial property returns in 2003 were higher than expected, reaching 12.7 per cent. The figure is just below the long-term 20-year average of 13.3 per cent per annum but more significantly, it is considerably better than the 2.2 per cent returns reported for 2002.
The SCS/IPD Property Index shows that the buoyant retail sector continued to drive performance in the final months of 2003.
All property returns for the three months reached 3.8 per cent, up from the 3.6 per cent reached in the previous quarter and 0.2 per cent delivered in the final quarter of 2002.
At the all-property level for last year there was a very marginal decline in rental values in the three months to December as the office and industrial rental trends weakened.
Equivalent yields, however, continued to fall in all three sectors of the market ensuring that overall capital values rose by 2.3 per cent.
With total returns of 12.7 per cent, property was the mid-performing asset class in 2003. After a poor year in 2002, equities rallied to achieve an annual return of 26.1 per cent. Meanwhile gilts, the top performing asset in 2002, with returns of 10.4 per cent, slipped to 4.3 per cent for the year.
Property remains the top performing asset class over three, five and 10 years but over 20 years, the hierarchy is as follows: equities with returns of 15.2 per cent per year, ahead of property at 13.3 per cent, followed by gilts at 10.4 per cent.
Retails were the star performer in the fourth quarter of 2003, with returns over the three months of 8.9 per cent. While rental growth slowed slightly to 2.3 per cent from 3.2 per cent in the third quarter, capital values were boosted by a 26 basis point reduction in yields, reflecting continued investor demand within this sector.
The annual return at 26.9 per cent in retails - the third highest on record - was based on a 21.4 per cent increase in capital values that owed slightly more to a 56 basis point fall in the equivalent yield than a rise in rental values of 8.7 per cent.
The index shows that having improved steadily over the first nine months of the year, office returns fell by 1.0 per cent in the fourth quarter of 2003. This was below the 1.9 per cent achieved in quarter three, rental values having fallen by 1.2 per cent, offsetting only a modest two basis point reduction in equivalent yields.
For the year, returns of 6.2 per cent comfortably exceeded the minus 2.4 per cent achieved in 2002, with capital values largely unchanged as a 1.6 per cent decline in rental values was cancelled out by a five basis point fall in yields; office performance was primarily income based in 2003.
Following a dip in the third quarter, industrial returns bounced back to 2.3 per cent in the final three months of the year. An eight basis point fall in the equivalent yields more than compensated for the 0.34 per cent decline in rental values. The performance of industrials in 2003 was entirely a product of their income return, capital values having edged down by 0.4 per cent during the year.
However, at 6.7 per cent, returns were comfortably in excess of those achieved in 2002. For the third year in succession, retails delivered the best annual returns, followed by industrials and offices.
The 20 percentage point gap between the top and bottom performing sectors at the end of 2003 is the largest on record.
