The real estate market is continuing to perform well in the UK, with the industrial sector leading the way.

Third quarter figures showed values rising by 3% for all commercial property, which is down slightly on last quarter’s 3.3% growth, according to the IPD UK Quarterly Property Index.

The market has now grown for five consecutive quarters. The strong level of value growth contributed to a total return of 4.4% for the quarter, the second highest since the first quarter of 2010.

Shift in retail

Reflecting a shift in markets, retail warehouses took over from shopping centres as the strongest retail property type, their values rising by 2.8%, while standard shops performed weakest.

Consistent with the trends of the current recovery, the retail sector was, however, the weakest area with a return of 3.7% compared to the second quarter’s 4.3%.

Nevertheless, retail still saw its second best quarter of the recent recovery, with values growing by 2.3%.

Retail rental growth remained sluggish for the sector as a whole at just 0.2%, even though this was its highest level since early 2008.

Rental vs capital growth

While the third quarter of 2014 saw overall capital value growth ease off slightly after its acceleration in the last quarter, rental value growth improved slightly across all UK commercial property. It rose from 0.7% in the second quarter to 0.8% in the latest figures.

Nevertheless, the majority of capital value growth stemmed from continued improvements in investor sentiment as yield compression added 2.7% to values over the quarter.

The 12-month return for the year to the end of September rose to 18.3% - significantly up on the return of 16.4% to the end of June.

The return to the end of the third quarter was also the highest level recorded since 2010, reflecting the continuing market upswing across the country.

Industrious industrial

The industrial sector led the market returning 5.4%, the same as its previous quarter performance.

The office return stabilised with a return of 5.1% for the quarter, although it still registered the strongest capital performance, matching industrials value growth of 3.9%.

The industrial sector’s performance advantage was as a consequence of its higher level of income return at 1.5% for the quarter.

Tom Grounds, senior analyst in Strutt & Parker's research team said: “Strong property performance in the penultimate quarter of the year continues to reflect strong capital flows into the sector.

"With the largest economies’ government bond yields at such low levels around the globe, and having recently lurched downwards following another burst of market jitters, we do not expect this appetite to diminish for the time being.

"Rental growth continues to primarily occur in London and is helping to underpin very low yields in the capital.”