Annual all-property returns hit 20.1% in October, a surge driven by offices in the South East and London.

November 2014

Key points

  • The UK all-property total return had already exceeded 2013 levels by the end of September.
  • We expect all-property total returns to comfortably exceed 20% in 2014 and be in the region of 17-18% for 2015.
  • Office markets continue to lead the way, delivering annual returns of more than 20%.
  • With few signs of the UK real-estate market overheating, we believe the current up cycle has further to run.

Returns going south

UK real estate continues to perform very strongly, with high levels of buying activity from both UK institutions and overseas investors. According to IPD, all-property total returns hit 20.1% p.a. in October, the strongest performance since 2010. Offices in the South East and London have continued to lead the market with annual total returns running in the high twenties. But the industrial sector follows closely behind. Returns from retail property, while the weakest of the three main segments, are also strong by historic standards.

New developments nationwide

Yield-driven capital growth remains the main driver of performance. At the same time, the improving economic outlook is translating into stronger occupier demand and rental growth throughout the UK. Central London continues to experience the fastest rental growth. Elsewhere the occupier recovery is more moderate, but generally positive. There are also increasing signs of the development cycle picking-up again, particularly in Central London but also in some regional markets.  

High returns, low yields

A high level of investor demand is likely to remain a feature of the market in the near term. This should drive additional yield compression which, combined with positive rental growth, will translate into strong total returns. Indeed, total returns in 2014 are likely to comfortably exceed 20%. But with yields in some markets such as Central London offices at or near record lows, some are asking whether the cycle can go much further. We believe it can and will.  

Opportunities remain

Firstly, there are few signs that the market is overheating. For example, there is no evidence of a development boom, while the market is hardly leveraged to excess. Secondly, while real estate may look expensive relative to historic pricing levels, it certainly doesn’t look expensive relative to other low-risk, income-producing asset classes. Spreads between property and government bond yields, for example, are very high compared to the levels experienced in the decade preceding the global financial crisis. This has remained the case despite significant yield compression in the UK real-estate market as government bond yields have fallen.   

Boosting returns in the near term

And the trend looks set to continue for a while yet. The prospects of loose global monetary policy have increased as concerns over the strength of the global recovery intensify. We now expect rates to remain even lower for even longer, leading to further yield compression. Indeed, record low yields in some parts of the market now look likely. This will generate significant capital growth and boost total returns in the near term: this could be in the region of 17-18% for 2015.  

Photo of Richard Levis
There are few signs the market is overheating. For example, there is no evidence of a development boom, while the market is hardly leveraged to excess.

Richard Levis

Global Real Estate Analyst

Long-term value

Beyond 2015, the scope for further yield compression will fade. We expect total returns of around 8% per annum over the next five years as a whole, suggesting UK real estate currently offers decent value on a risk-adjusted basis. 


We have revised our forecasts for the UK real estate market and now believe the upward leg of the cycle will last longer and go further. Thanks to ‘even lower for even longer’ interest rates, the window of opportunity remains open. Property continues to offer good value for those able to get their money into the market expediently. We therefore have a more optimistic view of the amount of value there is in the market today.  


Important information:

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 1 November 2014. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. 

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