UK Real Estate Returns Slid as Capital Growth Tumbled

Quarterly total returns for U.K. property fell to -11.9% in December 2022, the lowest level since 2008, according to the MSCI UK Quarterly Property Index. A 12.8% drop in all-property capital values in the last three months of 2022 was the major drag on performance as high inflation, rising interest rates and a higher cost of capital all impacted the market.

There was a rapid turnaround in the performance of U.K. investment property last year. Total returns remained positive until the third quarter, but an ongoing shift in monetary policy — the Bank of England base rate went from 0.25% to 3.5% during the year — meant that property yields increased to accommodate a higher risk-free rate and higher cost of capital.

Industrial property under pressure

The impact was most keenly felt in the industrial sector, where yields had compressed to a record low at midyear. These yields have since increased by more than 120 basis points and caused the industrial sector’s capital values to fall 26% between June and December, according to the index. The sector has never recorded such a loss of value in such a short time.

Price discovery between buyers and sellers of privately traded real estate can impede transaction activity during periods of uncertainty. While the decline in capital values is unwelcome news for property owners, the already-substantial correction may allow the market to start trading in greater volumes.

Quarterly rental growth remained positive for hotel, office, residential and industrial property, the index results showed. A widely forecast economic slowdown in the U.K. will, however, likely act as a headwind through 2023.