UK property prices are steadily improving, as the European economy continues to strengthen, according to the latest property index and outlook from F&C Investments.

UK property prices are steadily improving, as the European economy continues to strengthen, according to the latest property index and outlook from UK firm, F&C Investments.

The F&C Reit IPD Monthly Index revealed that all property returns totalled 4.7 per cent in the fourth quarter, continuing the quarter on quarter improvement witnessed throughout 2013. The full year total return was 10.9 per cent representing the strongest annual result since 2010. In this respect, rental growth also improved to 0.4 per cent - a modest number - but still the strongest three month figure since March 2008.

As such, the statement said that the past few months saw sentiment towards property become much more positive, as the UK has seen better economic data more recently as GDP continues to grow and inflation has moderated back to its 2 per cent target rate, while employment data continue to indicate a strengthening economy.

Consequently, house prices have risen in London and in other UK regions.

“Last quarter, we noted increasing signs that buyers were looking more closely at the regions and also moving slightly higher up the risk curve to consider near prime/good secondary and prime property with shorter income streams but growth potential. This trend continued during the fourth quarter,” the outlook explained.

Foreign investors favour London

Furthermore, the improving economic backdrop has contributed to increased investment in property. In the final three months of 2013, transactions were at their highest quarterly level since 2007, according to Property Data. Overseas investors remain active buyers of UK property but the quarter was also notable for a surge in net investment by UK institutions, which exceeded that of foreign purchasers.

“Investors still favoured property in Central London and “other”, often long lease, assets. However, pricing in this part of the market has become very keen,” the index revealed.

Industrial & office outperform retail

Other market segments like industrial and office property significantly out-performed the retail market, continuing a trend that began in mid-2011. West End/Midtown offices led the way with a 7.7 per cent quarterly total return, while South East and Central London property enjoyed total returns in excess of 6 per cent.

Conversely, the occupational market saw some signs of stabilisation but still presents a mixed picture, as rents continued to fall in most parts of the retail market. In addition, annual all property gross income growth continues to flatline, as all three main sectors fail to experience real income growth, and high business rates continue to affect landlords’ ability to raise rents.

Forecasts strong returns in 2014

Finally, this prompted the F&C forecast to predict another year of double digit total returns from property in 2014. Performance may be a little less buoyant later in the forecast period, the outlook said, partly reflecting the short-term boost from pent-up demand as both occupiers and investors take delayed action following the Eurozone crisis and UK economic slowdown. Later in the forecast period, the possible implementation of more restrictive fiscal and monetary policies post-election could also affect performance, especially if interest rates edge higher or gilt yields normalise, the outlook concluded.