Investment returns on UK Commercial Property grew by 20.1% in the year to October, the highest among the nine1 key asset classes in this review according to new research by Lloyds Bank Private Banking.
Investment returns on UK Commercial Property have been boosted by falling yields, as investor confidence improves; whilst the continuing economic recovery has lifted rental growth.
Global Equities rose to a record monthly high in October providing returns, as measured by the MSCI World Total Returns Index, of 12.8% in the past year – the second highest in this review. Although global economic activity has been moderate, the distribution of that growth has been uneven; with a quickening pace in the US and UK, slowdown in the Eurozone and little change in China. The European Central Bank's further cut to its interest rates and intended purchases of asset-backed securities to stimulate the Eurozone economy are likely to have supported Global Equities. (See Table 1)
The average annual return for the nine key asset classes has edged down from 4.6% in October 2013 to 3.9% in October 2014. While returns for several asset classes have increased in the past year there have been declines in returns earned on Precious Metals and Commodities. (See Table 2)
After Commercial Property and Global Equities, the largest returns were in UK Residential Property (11.3%), UK Bonds (6.7%) and International Bonds (5.5%).
At the other end of the spectrum, investor returns fell in Precious Metals (-17.8%) and Commodities (-4.9%).
Over the past year, total returns (based on house price growth and rents) from UK Residential Properties grew by 11.3%2. This was driven by average housing values rising by 7.6%3 and returns on private rents growing by 3% between October 2013 and October 2014.
Ashish Misra, Head of Investment Policy at Lloyds Bank Private Banking, says: ”In the year to October, UK Commercial Property has been the best performing asset class. Investment returns on UK Commercial Property have been boosted as investor confidence has improved on the back of a positive economic outlook. Recovery in both the occupier and investments markets has been in full swing for much of the past two years raising demand, and with supply slow to respond, driving up rental growth and capital values. Whilst demand in London has driven returns for much of the period, recovery in the regions appears to be coming through more strongly now as well."
UK Bonds delivered a total return of 6.7% in the year to October 2014; over one per cent higher than the return from international bonds (5.5%). This reflects, in part, greater investor confidence in the UK economic outlook, as well as the slowdown in the Eurozone economy and the growing political uncertainty in Eastern Europe and the Middle East.
For the second year running, Precious Metals have significantly underperformed against other asset classes, with prices falling by 17.8% in the 12 months to October. During this period, the price of Gold fell by 11.9% and silver by 10.5%.
Gold's twelve year run ended in 2013 when the price fell by 27.0% in both November and December 2013. Weaker consumer demand in leading markets for gold in India and China has seen the price deteriorate further in 2014. The continued strength of the US dollar has also worked against the Gold price.
Coffee was the top performing commodity over the year with a price rise of 76.1%. Rising supply side pressures resulting from the worst drought in 50 years in Brazil, the leading coffee producing nation, have underpinned the marked increase in coffee prices. In contrast, soft wheat was the worst performing commodity, recording a 34.9% price decline. Crude oil, corn, soya beans, heating oil and hard wheat also recorded price declines in the range of 16% to 27.5% based on expectations of increased supply. On the other hand, there were price increases in zinc (20.7%), aluminium (13.3%), and cocoa (9.5%).
A slowdown in the Chinese economy, weakening demand elsewhere and a shale gas boom in the US have been key drivers in the price of crude oil falling to $80 a barrel in October, a fall of 16.4% in the past year.