The commercial property market reported increasing returns up by 18.8% in 2005, according to F&C Property Asset Management.
Its market review showed total returns running at a 24% annualised rate in the final quarter.Although equities have made a comeback, property out-performed them at the end of 2005 and over five and 10 years.
Sector performance converged in 2005, with only 1.1% separating the main sectors. Rental growth hasappeared in all markets and yields have fallen to new lows as investors have put a record £50 billion into the sector.
Paul Herrington, head of property at F&C, and the author of the review, pointed out that property performance is expected to remain strong in early 2006 due to its current momentum, the short-term outlook for interest rates and a modestly improving economic performance. A return to more sustainable rates is expected during the course of 2006, as the scope for further inward yield shifts is reduced.
According to Herrington, the downside risk to property is that investor demand may falter due tobetter alternative investment opportunities, a changed interest rate regime or a perception that it has become over-priced. On the upside, property is being re-rated and is becoming more accepted as a mainstream alternative to gilts and equities.
Additionally, the UK is favoured by global investors for its transparent and mature market. Propertyremains attractive for its income characteristics and diversification benefits. The property market is continuing to develop new products to meet the needs of investors, and the successful launch of a UK REIT would further increase property's attractiveness to them.
In the medium-term, F&C expects property to deliver steady total returns in the high single digitsand to return to its traditional model whereby total returns are largely driven by income returns.
Town centre retail is forecast to under-perform, hit by structural as well as cyclical issues and retail warehousing may not match its past record. Offices, especially in Central London are expected to out-perform as they recover from recent lows.
The growth of the property market is expected to broaden the market of suitable assets withinvestors looking to Europe, second tier office centres, other property products such as leisure and student housing and to more flexible investment vehicles to meet their investment needs. Development is increasingly being seen as a means to enhance value.