US real estate delivers strongest returns for five years

US real estate has delivered the strongest investment performance for five years, at 15.1% total return for 2010, according to the IPD US Quarterly Property Index.

The continued recovery in market values is responsible for the dramatic turnaround from 2009's -18.7% annual total return, with positive capital growth stretching on for the third consecutive quarter with 3.2% in Q4 of 2010. This was, however, shallower than Q3's 3.3%, which was the strongest quarterly capital growth in IPD's 11-year index history.

The headline annual total return was the result of 7.6% capital growth over the year - which included a compounded 8.1% rebound in values since Q1 2010 - together with an income return of 7.0%. The rebound has been driven by falling cap rates, which compressed throughout 2010 by 80 basis points to 6.3% at the all property level.

Performance by sectors
Within the sectors, the star performer has been Apartments which returned 23.8% for 2010 - an annual return eclipsed only once in the index's 11-year history by 10 basis points in 2005. Apartments' returns are driven by Bull market level capital appreciation, which saw a 16.8% rise in values.

Simon Fairchild, Managing Director at IPD North America explains: "The continued decline of home-ownership in favor of rented-occupancy for a number of years, exacerbated on by 2008's collapse of Fannie Mae and Freddie Mac and thus mortgage finance and restricted housing stock have combined to create an exciting investment opportunity in the Apartment sector - evidenced by the strong annual returns last year."

The returns for the other three principal sectors were significantly lower than Apartments, led by Retails, at 13.7%, followed by Offices, at 13.4%, and Industrials representing the weakest performance with a still respectable 11.4% return.

International perspective
The recovery remains much more modest than seen elsewhere. For example, the first three quarters in 2010 of capital appreciation in the UK delivered 14.5%, compared to 8.1% over the equivalent period in the US. There also continues to be an intriguing correlation between US and UK's capital growth trends, with the US nine months, or three quarters, behind the UK in terms of recovery.

The IPD US Quarterly Property Index measures US $88 billion worth of properties in predominantly core open-ended funds.