F&C Property Market Review
The key points contained in the review are:
* Property is forecast to deliver total returns of 15-16% pa in 2005, supported by a strong investment market.
* Sector performance will converge in 2005. Property selection and asset management will be the drivers of out-performance. The lack of quality stock and large lot sizes are leading to strong competition and high prices being paid. There are indications that some investors are profit-taking.
* There is some concern that the investment market has run ahead of itself this year. Yields continue to fall due to weight of money but prospects for further yield compression from these low levels are limited and consensus economic growth rates would be unlikely to stimulate rental growth significantly.
* A return to more sustainable rates is expected during the course of 2006, with income returns driving total returns. Secondary stock and top rented retail are especially vulnerable to corrections as the market adjusts. The investment marked may be affected by a shift back to equities, following its recent strong run while any upward move in interest rates could affect investment flows given the limited gap which now exists between borrowing rates and initial yields.
* On the upside, property remains in favour for its income characteristics and diversification benefits and the property market is continuing to develop new products to meet the needs of investors, with a UK REIT still expected in due course. Property is becoming more accepted as a mainstream alternative to gilts and equities.
* In the medium-term, we expect property to deliver steady total returns in the high single digits. Town centre retail is forecast to under-perform, hit by structural as well as cyclical issues while 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 - with investors 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
