Despite slowing in economic growth to 0.6% in Q4 2014, institutional investment in commercial property has remained strong in Q1 2015.
The commercial property market has undergone eight consecutive quarters of increasing prices, although the pace of growth has been slowing since last July. This slowdown is evident in the fact that capital values for Q1 2015 rose by 1.6%, compared to 2.9% in Q4 2014. Total returns decreased in line with this, falling 1.4% from 4.4% in Q4 2014 to 3% in Q1 2015, and returns in the year to March were down to 18.3% as compared to 19.3% in the 12 months to December.
Institutional investment in commercial property saw Q4 acquisitions of assets worth £3.1 billion, with sales of £1.3 billion. Net investment was up from £1.79 billion in Q3 to £1.85 billion in Q4. Over the year to December, institutions invested £5.73 billion compared to £5.69 billion in the year to September.
Pension funds continued to invest in commercial property, pouring in a further £263 million in Q4 compared to £402 million in Q3. This led to a slight drop in their investment in the 12 months to December, which stood at £1.15 billion compared to £1.16 billion in the 12 months to September. However, this remains a significant increase at almost double the £558 million invested in the 12 months to December 2013. Pension funds have been net investors in property for the last 31 quarters. Life companies were net investors for the fifth consecutive quarter, showing a strong move towards property at the end of 2014. Net investment in Q4 was up to £904 million, compared to £349 million in Q3. However, over the year to the end of December, total investment was down slightly from the year to September, standing at £2.36 billion and £2.55 billion respectively. Life companies renewed their interest in property in 2014 following a total disinvestment of £613 million in the year to December 2013. Investment by Property Unit Trusts slowed slightly, with a further £666 million invested in Q4, compared with £918 million in Q3. However, over the 12 months to the end of December, Property Unit Trust investment was up to £1.95 billion compared with £1.70 billion in the 12 months to the end of September, and a significant increase on the £1.21 billion invested in the year to December 2013.
The first quarter of 2015 has seen investment move away from Central London offices. Investment decreased by 63%, falling from £7.3 billion in Q4 2014 to £2.7 billion in Q1 2015. This market segment represented 23% of transactions in Q1, whereas in Q4, it accounted for 34% of transactions. Relative to Q3, Q4 saw a decrease in all segments with the notable exception of shops and supermarkets, where investment increased in Q1 by 63%, jumping from £820 million in Q4 to £1.3 billion in Q1.
The slowdown in property investment is evident not just from UK institutions and companies, but also from overseas investors. With regard to UK based operators, investment decreased 44% in Q1, falling from £10.9 billion in Q4 to £6.1 billion in Q1. Overseas investment saw a similar decrease of 48%, falling from £10.5 billion to £5.5 billion. Overseas investors represented 47% of the UK investment market in Q1, down from 49% in Q4.
In relation to other assets which saw significant institutional disinvestment in Q4, property remained a notable exception in that it continued to attract institutional investment. Institutions made net disinvestments in Q4 of £8.5 billion in UK equities, £7.0 billion in cash and other short term instruments, £2.7 billion in UK gilts and £1.7 billion in overseas equities.