UK - Institutional investors, including UK pension funds, are likely to tap into the UK property market for attractive opportunities by the end of this year, according to Aberdeen Property Investors' UK Property Snapshot.

Total returns are expected to recover strongly by 2010 onwards to deliver an estimated income return of over 8%, and this will attract fresh investment interest from institutional investors like pension funds and life assurance funds, claims Aberdeen, as base rates and inflation are predicted to be less than 2%.

"We think by the end of 2009 those kind of income returns will look attractive and we think pension funds will start to up their allocations by then," said John Danes, head of UK research and strategy at Aberdeen Property Investors.

"They are historically quite slow moving in terms of how they transfer money and move their allocations around but we think they will start to improve their allocations to property during 2009," he suggested.

The real estate investment manager believes foreign investors, including sovereign wealth funds, are likely to be attracted to the UK market as a result of opportunities from distressed sales and the 40% decline in capital values.

"Generally, the UK, relative to international commercial property, is looking a lot more attractive because the UK market has essentially fallen first and fastest. The UK has yield premium over a lot of continental markets now," Danes told IPE Real Estate.

Property yields in the UK, which currently stand at significantly higher levels than cash and bonds, are also likely to attract institutional investors.

Total returns for 2009 are expected to be weak and reach an estimate of -15%, driven by further rental falls and capital returns of -20%. The rate of capital value decline is, however, likely to lessen in the coming year.

The retail sector is predicted to outperform the other sectors over the next five years, with retail warehouses expected to deliver the highest five-year annualised returns, at 7.1%, according to Aberdeen.

Central London offices are likely to be the worst performing of all property segments because of over-supply and rental decline accelerating in the next couple of years. Their estimated five-year annualised return is expected to be the lowest, at 5%.

The industrial sector, whose rental growth has been affected by concerns of oversupply, less development finance, further economic recession and the effects of the empty rates legislation, is expected to slightly outperform the All-Property index total average returns of 6.3%, returning 6.7%.

A lack of debt is the main obstacle facing the UK real estate industry at the moment. according to Danes.

"Any debt-backed investments are going to take several years to cover because the banks are trying to de-leverage and build up their balance sheets. They won't be providing any debt to buy commercial property so the bounce-back may not be as strong as in previous real estate market recoveries," he said.

Aberdeen Property Investors currently manages around €30bn of direct and indirect property investments for clients through separate accounts and collective funds.

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