Property still upbeat despite slowdown in economy

The slowdown in the British economy has finally caught up with the property market. But despite concerns over the global economy, investment performance in the UK still remains attractive, according to researchers.

Sanjay Kapila, senior analyst with agents Knight Frank, says that despite a slowdown in property performance during the last three months of 1998, it is still holding its own.

"In spite of the continuing economic slowdown, the property market is holding up reasonably well. Total returns from property are likely to end the year at around 12 to 13 per cent, still a very respectable level of performance."

As Peter Evans, head of research at DTZ Debenham Thorpe, explains, the yield gap between gilts and property has never been bigger. According to his figures, in the last nine months of 1998, net investment in direct property by the institutions in the UK was £3.02 billion sterling.

Mr Evans says: "Interest rates have now come down five times in the last three or four months and we have the largest positive gap between property yields and the yield on government bonds. So we have a prima facie case for continued property investment."

Mr Kapila agrees and says institutional investors' appetite for commercial property continues be strong. "With property currently yielding around 7 per cent against gilt yields at 4.5%, this should encourage institutional funds to increase their portfolio weightings in favour of real estate. "In addition, property continues to offer strong defensive characteristics - income security, low volatility and diversification benefits".

And, in the short term at least, this gap will widen as it looks like interest rates will continue to fall, Mr Evans notes.

UK companies are taking advantage of these strengths in the market, but overseas money is also flooding in. According to DTZ's figures, direct gross overseas investment in commercial property topped £3.2 billion last year.

Michael Cutteridge, head of DTZ Debenham Thorpe's national investment team, believes the target market for foreign money is getting bigger. "There has been a broadening of the buying focus away from the traditional markets of Central London. This is due to a number of factors, not least the growing familiarity that a number of international investors now have with the opportunities and performance potential which some regional markets offer.

"Not only that, within the commercial market, further sectors have come into play. The industrial sector has also benefited from a willingness to invest in the regions, increasing its share of investment from just over £70 million in 1997 to over £300 million last year," says Mr Cutteridge.

According to Mr Kapila, the industrial sector is outperforming offices and retail investments which have been affected by a slowdown on the High Street.

Interestingly, speculation about Britain's reluctance to join EMU has yet to have a major impact on the market, as happened in the financial institutions. According to Mr Evans, the UK offers investors "diversification characteristics" when looking outside the euro zone. Also, it maintains its advantages as a deep, liquid market with lease structures that uniquely favour the landlord and a high element of research supported data.

Mr Kapila goes even further when considering the market as a whole. "The property market is well placed to ride out the current downturn in the UK economy," he says. "It is placed in good stead because of the basic market fundamentals exhibited by a favourable supply/demand balance, modest development activity and sustained tenant demand. These continue to hold despite weakening economic conditions."