UK – Secondary properties with long leases have outperformed prime assets with short leases over the past four years, according to Investment Property Databank (IPD).
IPD published its UK Quarterly Property Index today, posting a benchmark total return of 2.7% for 2012, but the company also revealed that 'quality' secondary real estate assets had been outperforming some sections of the prime market.
While long-lease prime assets continue to perform the best, a combination of strong income returns and competitive pricing has resulted in long-lease secondary assets being the second-best performer.
In 2012, long-lease prime returned 4.1%, long-lease secondary returned 3.6% and short-lease prime returned 2.7%.
The findings might provide support for a growing number of real estate fund managers that have been urging investors to avoid overpaying for prime assets by widening their focus to 'quality' secondary assets.
Phil Tily, UK and Ireland managing director at IPD, said the quarterly index for 2012 had "delivered the first good news for parts of the secondary market".
He added: "The question for 2013 is whether it will be a more level playing field over the next year. What we do know is that those funds performing the best over 2013 will focus very much on asset management."
IPD also showed that large life and pension funds had been the best performing type, generating returns of 3.1%.
The worst performers were balanced monthly funds, which returned 1.5%.
Most of market outperformance was achieved through having a high concentration to London. The capital provided 200bps of the benchmark total return, with the rest of the South East generating the remaining 80bps.
The divergence between prices in London and the rest of the UK have continued to grow: values in central London rose by 5% in 2012, but fell by 5.8% outside the capital.
The polarisation in property prices has now reached unprecedented levels: since June 2009 the divergence has widened to over 35% between central London and the rest of the UK.
Malcolm Hunt, UK and Ireland director of client services at IPD, said: "London owners are taking advantage of continuing international demand and selling carefully selected assets to strategically boost their returns."
He added: "Assets sold in central London over 2012 delivered a return to investors of, on average, 25%."