The Investment Property Databank (IPD) has unveiled a new Global Property Index, which indicates that returns from commercial property investments have been reducing throughout international markets.

Expressed in local currency terms, the total return for the 12 months to 31 December 2007 stood at 11.5 per cent. This was significantly down on the 14.7 per cent return delivered in 2006.

IPD co-founding director Ian Cullen points out, ‘IPD’s first Global Index is already documenting the complex and far-from-synchronised process of decline from the 2006 world market peak return. The fall in local currency total returns reflected deceleration or continuing decline in nearly all of the five largest contributing markets – the US, UK, Japan and France – with Germany alone improving on its 2006 result, despite a further fall in capital values. Higher returns were achieved when expressed in terms of sterling or US dollar investments, since these currencies deteriorated in value through the year. Conversely, yen and euro returns were lower as these currencies appreciated through the year.’

He continues, ‘The three years to end-2007 witnessed a boom in property returns across the globe, as the weight of investment capital pushed up values, though the precise peaks for investors have depended on the currencies in which they have been working. But for all denominations except the US dollar, the last three years’ total return has beaten the five-year and seven-year averages.’

Where were the best places to invest? Ian Cullen reveals, ‘In 2007, the strongest national market returns were those of South Africa, which returned 27.7 per cent, and the Pacific Rim countries: Korea, New Zealand, Australia, Canada and the US. Most European markets look to have passed their peak levels of return, with the UK showing a dramatic dive into property recession and a negative overall performance, even with the mitigating impact of income.’

Rural progress
However, while returns from industrial and commercial property in the UK have been faltering, investors in agricultural property and forestry have been enjoying record returns. The IPD’s Rural Property Investment Index for 2007 showed a total return of 25.7 per cent over the year, up from 17.6 per cent in the previous period.

Cullen says, ‘Specialist investments in rural land and forestry have demonstrated their diversification strength in 2007. This record return makes the Rural Property Investment Index the second-best performing IPD index in the UK last year, outstripping commercial and residential property, which earned investors -3.4 per cent and 17.0 per cent respectively, and slightly underperforming the IPD UK Forestry Index.’

He adds, ‘The total return can largely be attributed to the rise in capital values. Capital growth was 23.2 per cent for held property. Last year was, however, the lowest income-producing year since the index began in 1981, yielding a lowly 2.1 per cent. Tenanted rural farmland also saw net disinvestment. The investment figure as a percentage of the year-end capital value was -3.2 per cent, down from the previous year when disinvestment hit its highest level since 1996.’

Returns were not uniform across the country. Cullen notes, ‘There were regional variations in terms of total returns on held property. The East Midlands achieved the highest returns at 34.9 per cent, well above the UK average. However, the geographical spread of income returns were much narrower, with West Midlands rural properties yielding 2.8 per cent and those in the East of England producing an income return of 1.7 per cent.’