London, 27 April 2010 – According to the latest Jones Lang LaSalle UK Quarterly Property Index, all-property total returns increased to 6.2% in Q1. Returns were boosted by the 4.5% increase in capital values, which was driven completely by falling yields across all three major sectors.  The office sector recorded the strongest returns at 6.9%, reflecting capital value growth of 5.1%. Office capital values were boosted by strong growth in the City and West End office markets.  The retail and industrial sectors recorded comparable returns of 6.6% and 4.5% respectively.

Although average rental growth for all property remained negative in Q1 2010 at -0.05%, the office sector recorded the first positive quarterly rental growth since March 2008 at 0.18%.  This largely reflects the considerable improvement in rents in the City and West End office markets. The industrial and retail sectors recorded falls of -0.08% and -0.31% respectively. 

Given weak economic prospects, the market for secondary assets has not turned around to the same extent as the prime market. The Jones Lang LaSalle “style index” continues to show a discrepancy in investment performance between prime and secondary assets. This was also reflected in the Jones Lang LaSalle all property prime weighted yield, which moved in by 27 basis points to 6.0% in Q1 2010, although the pace of decline slowed compared to Q4 2009. Growth properties have accelerated ahead of value stocks again, representing strong returns in the office sector.  Quarterly returns were 7.4% for growth properties and 4.0% for value properties.  The difference in capital growth has also widened: 6.0% for growth stocks compared with 2.0% for value stocks.
 
Mike Penlington, Director in Jones Lang LaSalle’s Valuation Advisory team, said: “The margin between prime and secondary yields across all major sectors is substantial. Thus given the shortage of prime products, we believe opportunities can be found in the secondary tier of the market, where good-quality well-let properties can still be picked up at relatively attractive prices.”

Mike concluded:  “The occupational market however remains weak, thus any rental growth over the course of this year will be driven by supply shortages as opposed to strong employment growth. We also wait to see the implication of public sector cuts on office markets, particularly outside of London and the impact on retail properties resulting from how consumer spending will be affected by the expected higher taxes and public sector job cuts post election.”