UK property returns fell 11.9% in Q4 2022, biggest drop since 2008 - MSCI

© Reuters. FILE PHOTO: Property estate agent sales and letting signs are seen outside a building in Lichfield, Britain, May 3, 2022. REUTERS/Andrew Boyers/

By Elizabeth Howcroft and Amanda Cooper

LONDON (Reuters) -Returns on British real estate fell 11.9% in the fourth quarter of 2022, marking the largest quarterly drop since 2008, as interest rates rose and financing conditions tightened, MSCI's quarterly UK property index showed on Monday.

For 2022 as a whole, UK property returns fell 8.9%, the company said, following a "rapid turnaround" in the performance of UK investment property.

The quarterly property index measures returns across a larger sample size than MSCI's monthly property index, looking at 7,375 properties - mostly industrial, office and retail buildings - worth 140 billion pounds ($168.42 billion).

Britain's commercial real estate market has come under pressure from high inflation and economic uncertainty.

Several open-ended UK property funds placed restrictions on withdrawals, after pension schemes sold property assets to raise cash during a liquidity crisis in September.

UK industrial property capital values fell by 26% in the second half of 2022, in their steepest fall on record, MSCI's index showed, while industrial property yields increased by more than 120 basis points to keep apace with Bank of England (BoE) rate hikes and the higher cost of capital.

The BoE has raised rates 10 times since December 2021, in an attempt to combat persistently high UK inflation.

"While the decline in capital values is unwelcome news for property owners, the already-substantial correction may allow the market to start trading in greater volumes," said Tom Leahy, MSCI's head of EMEA real assets research.

MSCI said rental income from hotels, offices, residential and industrial real estate grew in the fourth quarter of the year.

The BoE said last week that Britain was on course for a recession, but that it was likely to be "much shallower" than previously feared.

MSCI said that the forecast economic slowdown in the UK will likely act as a headwind for growth in rental income in 2023.

($1 = 0.8313 pounds)