LONDON-Occupier demand for commercial property is undoubtedly softer, reflecting the weaker level of company investment and expansion, and rental inflation turned negative in parts of the market in the final quarter of 2001. That's the conclusion of UK Quarterly Market Beat, Healey & Baker's latest review of the UK market. However, with attractive yields, limited over-supply and a reduction in new development, investor sentiment remains firm.
Andrew Gulliford, deputy senior partner and head of Investment at Healey & Baker said: 'The property market ended last year with considerably better performance than equities or gilts and has now been the best performing sector over three and five years. This continues to fuel the argument in favour of institutions increasing their property allocation. In some quarters however, equities are viewed more positively for recovery potential. Similar arguments were advanced last year and since equities are now cheaper, some appear to believe they must offer yet greater value.
'Property has a less powerful voice in the City than equities or bonds, so a marked increase in allocations is unlikely despite the losses incurred in these other markets. However, the strong demand from the private market has at least been recognized by the institutions, with a number of them planning new products to sell direct to the public–we have seen Scottish Widows steal a march on its competitors in this respect.
'Institutions that do invest will face strong buying competition from private and overseas buyers, despite the indications of the euro's positive impact on investment within the eurozone. As a result, while the threat of higher stamp duty remains, the sector should see good investor demand. The supply of sensibly priced quality space is the main constraint on activity.'
Healey & Baker's research indicates that occupier demand during 2002 is likely to be subdued, at least in the opening part of the year. While activity in the retail sector may be strongest, the office market is expected to consolidate after its mauling last year with pockets of growth likely in London and the South and more particularly in key provincial cities.
Overall, rental growth of 1-1.5% is anticipated in 2002, concentrated in the latter months of the year. With improving yields, capital growth should improve and total returns are expected to be around 7.5-8%, rising further in 2003. Retail may outperform the rest of the market for the first time since 1997.
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