The UK housing market performance showed a strong performance last year as measured by the relatively new and innovative IPD Residential Investment Index.

The Investment Property Database Residential Investment Index allows contributing investors to accurately measure the investment performance of residential property in the UK and to draw like for like comparisons with commercial property and other financial assets.

It is a relatively new and innovative system of allowing investors to compare returns on let properties with the returns on commercial property and other financial assets.

The index is compiled by Investment Property Databank who have been compiling indexes for many years, but the residential index is only two years old. The data comes from leading property specialists as sponsoring companies to the database.

Last year saw a strong performance from the UK residential investment market. Properties let on modern leases returned 17.7%, a slight improvement on the performance in 2001. Residential property returns were significantly higher than those for commercial property and out-performed financial assets by a very wide margin for the second successive year.

Last year saw major regional variations in performance. The best performing properties were those in the Rest of Southern England with returns of 25.2%. This was thanks to robust capital growth of 18.8%, combined with a high rate of income return of 6.4%.

South East, Rest of UK and Rest of London also performed relatively strongly with returns of 21.3%, 20.7% and 20.5% respectively.

By contrast, Central London recorded the lowest returns in 2002 of 12.3% and it was the one region to see a deterioration in performance compared with 2001.

Capital growth slowed to 8.4% from 10.3% in the previous year and the rate of income return declined to 3.8%, in part because of a significant increase in voids.

The best performing type of residential property for the second year running was semi-detached houses returning 23.1%. It saw the largest increase in capital values of 16.6% and also benefited from a high rate of income return of 6.5%.

Terraced houses also performed relatively strongly with returns of 17.8%, comprising above average income return of 5.9% that more than offset the below average rise
in capital values of 11.8% in 2002.

Maisonettes and Flats recorded the lowest total returns of 16.0% and 16.4% respectively. Both types of property saw slower than average capital growth in 2002 and also had relatively low rates of income return.

The average annual gross rent paid by residential tenants in investment grade property in 2002 was £8,600. In general, regional variations were smaller than those by type of residential property. However, the average gross rent paid in Central London was still more than twice the national average at £18,800. The average gross rent paid in the Rest of Southern England was just over half the national average at £5,400.

In large part, capital values echoed the variation in gross annual rents. Thus the average capital value of residential investment property at the end of 2002 ranged from £323,600 in Central London, to £134,600 in Outer London, £191,400 in South East, £76,800 in Rest of Southern England and £64,600 in the Rest of the UK. The average capital values of flats and terraced houses, the two largest types by value, were almost identical at £125,900 and £125,500 respectively, at the end of 2002.

The difference between capital value and vacant possession value reflects the traditional practice of valuers applying a discount for an incumbent tenant. The average discount in 2002 was 8.2% and ranged from 2.2% on detached houses to around 10% on semi-detached and terraced houses.

At the end of 2002, voids were highest on terraced houses at 10.5%, compared with 6.6% for semi-detached houses and 8.5-9.5% on detached houses, maisonettes and flats.

Regionally, differences in voids were far more marked. Central London had the highest void rate at the end of 2002, at 13.6% of rental value, more than double that of the Rest of Southern England. In Rest of London, South East and the Rest of the UK, voids stood at 7-9.5% of rental value.

The average gross yield on residential property in 2002 was 7.0%. Once void periods and operating costs are deducted from gross income, the net yield was 4.4%. These were below those in 2001 by 0.2% and 0.8% respectively.

At the end of 2002, net yields were lowest on maisonettes, at 3.2%, followed by flats at 4.1%. Yields on terraced and semi-detached houses were similar, at around 5.0%, while detached houses had the highest net yield at 6.0%.

Predictably, at the end of 2002 net yields were lowest in Central London, at 3.3% compared with 4.5-5.5% elsewhere. Net yield in the South East, 5.6% at the end of last year, is higher than might otherwise be expected due to the large proportion of detached houses in the region's sample.

The IPD Residential Investment Index is based on a sample of 6,100 properties let on modern leases. The total value of this sample at the end of 2002 was £765 million. In keeping with the lettings market, the sample has a bias towards smaller properties, flats and masionettes accounting for three-fifths of total value. The second largest category is terraced housing accounting for 11.4% of total value, followed by detached and semidetached houses at 9.3% and 7.5% respectively.

At a regional level, London accounted for just over half of the total value of residential investment property in the Index. The remaining 50% of total value is split roughly equally between the southern half of England and the rest of the UK.

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