Assessing value is no easy task, even in normal times. But we believe that assessing the relative value of commercial property against a range of alternative asset classes, including government and corporate bonds, and equities, is a useful approach. To do this, we consider current property pricing in the context of its relationship with alternative asset pricing over the last ten years. For the UK, we have run an initial round of analysis, based on data up to Q2 2020. So, is UK commercial property currently fair value?
In recent years, our valuation scores suggest that the UK, in line with many other European markets, was looking expensive as strong investment activity drove yields to cyclical lows (see chart). But, ahead of covid-19, UK valuations started to turn as yield declines slowed, or reversed in the case of retail. Since then, there has been a steady improvement in all-property valuation scores.
Capital Economics’ All-Property Valuation Score