Although the UK manufacturing sector is technically in recession, consumer spending is still growing, and the housing market remains strong with low interest rates leading to a 16.8% increase in prices across the UK in the past 12 months. These conflicting indicators are reflected in the varying performance of different property sectors, said LSH.

At the end of 2001, average rental growth for the whole commercial property sector had fallen to 2.5%, down from 5.9% in the preceding year. Retail rents finished the year lowest, down to 1.8%. Industrial rents halved in 2001 down to 2.4% and office rental growth slowed from 9.8% to 3.5%. Reflecting this total property returns fell to 7.1%, although they still outperformed equities and government bonds.

Lambert Smith Hampton research head Arezou Said said offices in London and the South East would be hardest ht by the slowdown. 'In the West End, availability of office space has risen significantly,' he warned. 'Occupier demand has slowed and rents have softened and a two-tier market has arisen as occupiers return comparable properties to the Mayfair & St. James' market at a more competitive level. Reduced demand in the South-East should impact on the office market but this will be offset by better performance in the regions.'