UK - The commercial real estate market in the UK has bottomed out in relation to property yields, according to Ian Whittock, chief investment officer at ING Real Estate Investment Management.

Yields for prime UK real estate have hardened in recent weeks and competitive bidding has pushed up pricing in certain areas of the market, although some commentators question whether today's market values can be can be sustained in the face of a poor rental market outlook.

In contrast, ING's Whittock believes prices can be sustained and that investors are confusing two separate drivers of a recovery.

"The improvement in the capital markets should be differentiated from the occupational market where the worst is yet to come," said Whittock. "Rental values are still expected to fall, at least until 2011, and therefore the risk to rental levels and tenant default remains high."

Whittock admitted there was a danger in investors becoming over-enthusiastic to get back into the market, but said "barring another shock to the functionality of the capital markets - which remains possible if not probable - we feel that at least some of the re-rate is permanent and we are likely to have seen the bottom of the market in terms of yields."

Whittock said he had never seen a market move so fast, estimating that yields have moved out by close to 100 basis points in eight weeks.

"The worst of the market is behind us," he said, predicting quarterly total returns to start improving quickly to the extent investors might see positive returns before the end of the year.

"This should produce a short-term spike in returns as the correction takes place before returns subside in the face of further rental value falls," he explained.

"Whether returns go negative again will depend on the pace and extent of further falls in rental values."

ING REIM is forecasting a rental decline of approximately 15% between now and the end of 2011.

"The smart strategy is to avoid those parts of the market most exposed to rental decline during this period," Whittock said.