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UK property to perform in 2010, says Prupim

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After a period of poor performance, UK commercial property is likely to deliver strong returns in 2010 and beyond, according to research from commercial property fund managers Prupim.

Despite continuing uncertainty over how banks might unload their property exposure and what the political and economic context will be for the market after the general election, UK commercial property appears set to provide institutional investors with double-digit returns in 2010, according to Prupim’s latest UK Real Estate Perspective report.
 
“The potential for politically-driven austerity measures and the currently inscrutable investment strategies of property bankers are troubling property investors currently but the balance of data suggests significant capital growth this year, with a return to steadier growth in the years afterwards. Investors perceive UK commercial property as being in a ‘sweet spot’ offering the potential for higher returns than high grade bonds with less risk than equities,” says Paul McNamara (pictured), director: head of research at Prupim.
 
The report says that the speed at which banks unwind their property exposures will be an important factor in determining the level and pattern of returns going forward. It notes that a fire sale of prime assets seems unlikely, but unloved secondary assets may be drip-fed onto the market as investor’s risk appetite grows with an improving economy.
 
“Today’s is a polarised market with all the activity going on at the top end of the market. In a more vibrant economic environment, one might expect demand to cascade into ‘next best’ markets but investors remain unwilling currently to venture far into secondary markets and will probably remain so until greater confidence returns to the UK economy.”
 
The report also notes that significant rental growth in most sectors may still be up to two years away but that the worst of the rental declines are over. The collapse of development activity in recent years appears likely to assist rental growth.
 
“Accounting for up to three quarters of overall returns over recent history, income return remains a critical and often forgotten factor in delivering returns to property investors. Rents are still falling in many markets but the pace has lessened considerably,“ says Richard Gwilliam, senior research analyst at Prupim.
 
The report notes that central London remains a particularly competitive market, attracting investors from many international countries, burgeoning UK retail funds and cash-rich high net worth individuals.
 
”Taking a long-term view, property remains good value with an improving, albeit subdued, outlook for the rental fundamentals. Looking ahead, the greatest challenge for investors in the short term will be securing their ambitions given the limited supply of assets currently considered acceptable. Some may cascade their interest onto ‘next best’ markets or they may move their capital elsewhere,” says McNamara.

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