UK - The latest results from Investment Property Databank's (IPD) UK quarterly property index have prompted fund managers to question the sustainability of the market's recovery.

IPD recorded the largest ever quarterly capital growth of 8.1% in the UK during the last three months of 2009, despite rents continuing to decline across the real estate sector.

The anomalous results, which saw total returns amount to 10% in the final quarter of 2009 and total returns for whole of the year rise to 3.4%, have caused investors to question why yields and rent levels have come down at the same time.

At the breakfast briefing last week, Duncan Owen, chief executive officer at Invista, said: "Rents and yields should not go down at the same time - it is a little bit like defying gravity and when it has happened in previous cycles that I have experienced, it has ended in tears in the subsequent period."

IPD co-founding director Ian Cullen said: "When the dust finally settled on the oscillations of last year, what emerged was a picture of rents and yields going in counter-intuitive directions - that is, simultaneously, record-breaking positive yield contributions in the context of some of the worst rental decline we have ever seen.

"It is almost as if property investment has become detached from the real economy, and is instead driven exclusively by highly volatile shifts in capital flows which are immediately reflected in a truly amazing yield reversals; flipping from the decade's most damaging to most beneficial impact in a matter of months," added Cullen.

Henderson Global Investors has forecast total returns from UK real estate will reach double figures in 2010, before the market recovery reaches a plateau in 2011.

"Over 2010, UK All-Property returns are likely to hit double figures in 2010, largely driven by a continued rally in the first half caused by lack of investor stock and the weight of money entering the market," said Mike Keogh, research manager at Henderson.

However, Henderson has admitted it is concerned about this outlook if asset prices continue to rise too quickly in the short-term due to aggressive competition from investors.

In its latest UK real estate research report it said the market could "experience a pricing wobble, as investor confidence, sparked by the rebound in equity markets, wanes reflecting the underlying weakness of the UK economy".

Mayfair Capital Investment Management was also surprised by the IPD results but is cautiously optimistic on the potential for generating investment returns in 2010.

"Whilst yields have rebounded from an oversold position, what is surprising is that yields have corrected at a time when rents continue to fall, albeit the rate of decline is slowing," said James Thornton, fund director at Mayfair.

"Notwithstanding this, the risk premium remains at 400 points, meaning that there is scope for further capital appreciation in 2010."

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