Total returns positive

Despite all of the negative pressures on UK commercial property values - depressed tenant demand, rents not being fully collected, etc - the MSCI (IPD) total return indicator for the fourth quarter of 2020 was a positive 1% (over the three months). Rental values fell slightly, while yields also fell (a positive effect), but the most positive element was the contribution from rental income.

Not surprisingly, retail returns were negative. The main exception was supermarkets, supporting my decision to invest in a REIT that specialises in that sub-sector. The worst performance was from central London retail (normally considered to be the prime) and shopping centres (which now internalise all of the negativities associated with the sector), at just under -8% over the quarter.

The worst performance from offices was from those in the West End - the best performers over the long-term - with -3% over the quarter. The best, and the only substantially positive returns were from the industrial sector at around +6%, with little to differentiate between location or type.

While the capital value pricing adjustments to retail are part of a continuing trend, albeit speeded up by the pandemic, the mildly negative returns from offices - mainly caused by yield rises - will soon start to be producing buying opportunities for those investors who can hold their nerve for a year or two.

The best opportunities, almost by definition, arise when uncertainty is greatest, but the vaccine programme is well underway and this will bring about a return to (close to) 'normality' by the third quarter.