Prime business parks have once again seen total returns more than double in the last year as their performance continues to improve, according to the MSCI/ Strutt & Parker Business Parks Index.

Last year S&P Parks returned 21.8%, outperforming the wider MSCI Business Parks sample (21.3%) and marginally lower than MSCI Standard Offices, excluding central London, which produced 19.6%. A positive yield impact of 13.5% with increases in rental value drove capital growth of 14.0%.

In the ten years to end-2014 S&P Business Parks have provided better returns than the wider office market (excluding central London). Strong income returns have been the main driver over this longer period, compensating for falling rental values and widening yields.

S&P Business Parks continued to perform well in the first half of 2015. The monthly sample delivered a total return of 7.4%, or 15.3% on an annualised basis. Rental growth of 3.1% indicates the value for money that the best parks now reflect for occupiers.

Take-up in the South East office market in the first three quarters of 2015 was strong with 2.3m sq ft of space contracted, compared to 2.4m sq ft for the whole of 2014. Research indicates that tenants remain attracted to out-of-town locations and that in-town stock within the South East is highly constricted due to the lack of availability in urban areas. Further constriction on in-town development is envisaged as a result of permitted development rights, and as such out-of-town parks are attractive to occupiers looking for large floorplates.

Business parks continue to be an important sector within the overall property investment universe. In the 12 months to Q2 2015 a record amount of investment into the sector was witnessed. Those investors who targeted the sector in 2012/3 have been vindicated by performance in recent years, with the sector now out-performing the wider office sector. Clearly double-digit performance cannot be maintained, but yields remain attractive and rents appear to have turned a corner. Looking forward, Strutt & Parker and MSCI anticipate investment in 2015 to exceed £2bn, with the potential to exceed the volumes seen in 2014. Investors remain attracted to quality business parks and anything brought to market, with good fundamentals, is likely to be transacted above the original asking price.

Total returns in 2014 were strong across all lease lengths and capital growth is being in short-let properties, demonstrating that investors have confidence in the strength of the recovery.

Andy Martin, Senior Partner at Strutt & Parker, said: "Despite out-performing its peer group in 2014, and with 2015 set to deliver another year of double-digit returns, the sector still faces strong challenges going forward. At present the best business parks can readily satisfy the needs of many occupiers in terms of accessibility, cost and quality. However, with employers more conscious than ever of the need to provide an engaging, amenity rich, environment for employees, innovative investors will need to ensure that a business park is able to meet this important element of occupier demand if they're to maintain their appeal."

Stephanie McMahon, Head of Research at Strutt & Parker, said: “Whilst the results for the last two years have been good for S&P Parks, the sector still faces a number of challenges. We anticipate the increased densification of business parks from both the perspective of squeezing more income from the acreage by building upwards and also by increased site coverage. Alongside this we expect parks’ public spaces to become similar to those in successful urban centres, with high quality pedestrianised streets, public squares, and a diverse range of eating and drinking establishments.”

Colm Lauder, Senior Associate at MSCI commented: “UK Business Parks, as defined by S&P, performed strongly in 2014, providing investors with a total return of 21.8%. This was the strongest performance in over a decade, and firmly reflects the growing interest investors are taking in this property type, particularly for parks that offer active asset management potential.

“Investor returns were driven by yield compression, as a positive yield impact of 13.5% - the largest since 2005 - pushed equivalent yields down from 9.3% in 2013 to 7.6% by the end of 2014. The improving investor attitudes towards a property type that had lagged the market in recent years show a marked turnaround in confidence and helped push capital values up by 14.0% in the twelve months to December 2014. Occupier demand was only marginally improved from 2013, as rents rose by 2.6% compared to average rental growth of 7.4% of all UK Offices, as measured by the IPD UK Annual Property Index.”

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