Welcome to our annual Business Parks Index which tracks the performance of select UK business parks to enable us to benchmark the performance of the best parks versus the wider MSCI universe, in order to understand the key drivers of return.
The Strutt & Parker Business Parks Index measures the performance of aselect sample of business parks from within the wider MSCI sample. Theseparks have been identified to give investors an overview of how the bestparks perform relative to the wider market. Typically they are characterisedby the provision of good accessibility, amenities, car parking and sitemanagement. The sample for 2015 consists of 90 assets across 24 parks,valued at £1.36bn as at 31 December 2015.
Following the exceptional returns (21.8%) seen in 2014, 2015 was alwayslikely to see some moderation, registering a total return of 14.1%, driven bycapital growth of 7.8% and an income return of 5.9%. And no doubt 2016 andbeyond will see a further moderation with income likely to be the primarydriver. What bodes well, Brexit notwithstanding, is that 2015’s capital growthwas helped along by a 6% increase in rental values, the highest figure since2000. Taking the view that sustainable returns are income plus long-termrental growth, the sector still appears to have the prospect of reasonableabove-inflation returns, providing it can continue to remain relevant.
S&P Business Parks also outperformed the MSCI UK Annual All PropertyIndex for the second year in succession, with the full index reporting atotal return of 13.2%. However, the S&P sample of business parks wasoutperformed by MSCI Standard Offices*, which saw strong yield-drivencapital growth over the year. MSCI’s quarterly data to Q2 2016 does show,however, S&P Business Parks delivering a return of 3% on a half-year basis(6.1% annualised) versus 2.2% for the wider MSCI Business Parks sampleand 2.7% for MSCI Standard Offices*.
Given the outcome of the EU Referendum and the ongoing uncertaintyregarding the future nature of our relationship with the EU, it would be fairto say that a full-year total return of 6% should be regarded favourably.Particularly in light of the fact that, based on a half-year return of 2.5%,MSCI UK All Property is heading toward an annualised return of 5% for2016. Clearly a straight-line continuation of H1 2016 is unlikely, and the thirdquarterfigures released shortly will give us a better idea.
On a more positive note, we need to give due attention when discussingnominal returns to current and expected inflation. Although the outlookfor nominal returns in the next few years appears to be in the single-digits,inflation in the UK, and the rest of the developed world, is suppressed - wellbelow central bank targets. At the same time UK 10-year Gilts are trading atsub-1% yields. Consequently on a ‘real’ inflation-adjusted basis the outlookfor returns is not as poor as it first appears.
Indeed, we are seeing increasing discussion amongst major investmentinstitutions around the globe regarding the need to invest in ‘real assets’in order to counteract the mounting pension deficits stemming fromquantitative easing’s bearing down on gilt-edged returns. Although weshould avoid marketing real estate as a bond-like investment – in the longtermit certainly isn’t – it’s clear that attention is set to increase. Thoseinvestors with the correct advice, focusing on customer (tenant) needs, andnot seeing property as a buy-and-forget asset, will do well. Real returns of4% or more should be viewed favourably. Welcome to the new normal.
We hope you find our research both informative and of genuine commercialuse when considering this asset class, and would welcome your views onany of the subjects raised. If you would like to discuss the findings andtheir implications in further detail, our research team would be delightedto hear from you.