London was the UK property market's only hope, and now even the capital is beginning to slow (temporarily), says Shayla Walmsley.

IPD data out this week suggest London is continuing to prop up a moribund UK property market. City office returned 0.4% last month against a -0.3% decline across the market, and IPD UK and Ireland managing director Phil Tily said confidence in London's evident ability to keep growing "should lend some assurance to the industry" despite concerns over City pricing.

The problem is that London's ability to prop up returns for the whole market isn't as certain as it might have been just a couple of months ago. Even aside from bubbly pricing, the market isn't necessarily behaving as predicted. Land Securities chief executive Robert Noel acknowledged this week that the positive impact of supply constraints in central London was taking longer than expected to emerge. Admittedly, a meagre pipeline means a supply-constrained environment will last longer when it does, but, in the meantime, investors in the capital can expect more muted occupier demand even for prime assets.

IPD has a somewhat more upbeat prognosis for the UK - or at least for its capital. The euro-zone's intractable economic problems could reinforce London's status as a safe haven. "Though returns are declining, they are declining slowly," said Tily, which could be a blessing if the euro-zone crisis plays out significantly in the equities market.

Well-capitalised, cautious investors are still doing deals. Korea's Public Officials Benefit Association (POBA) pension scheme this week entered the UK market with the acquisition of a City office asset for £165m (€206m). In what could be considered a belated entry, the buyer acquired the asset as part of a separate mandate focused on core City assets promising long-term income.

If London did not exist, the UK would have to invent it because the long-predicted investor shift to second cities in search of value has not materialised - much.

Residential may be an exception, but primarily because developers such as Grainger are willing to invest just outside London, in the relatively wealthy southeast, as well as in the capital itself. Still, chronic national undersupply may mean that will change. The chief appeal of a Home Counties industrial park acquired by an unidentified pension scheme this week for £4.7m appears to be the planning permission that came with it for major residential development.

In the capital, planning permission - even within new rules planning minister Greg Clarke describes as enshrining "a spirit of positivity" - generates almost as much hype as a completed transaction. CapCo's 22-acre Earls Court residential-led mixed-use development has at least part of its local authority planning permission secured, and investment director Gary Yardley (unsurprisingly) says he is confident of the rest. Redefine International last week announced that it had planning consent for a smaller 287-unit project in Harrow, on the capital's outskirts.

Retail - which had previously shown regional signs of life, with some investors looking to locally dominant shopping centres - has begun to look problematic. Regional shopping centres have fallen by -6.5% over the past six months. Fund data released this morning by IPD suggest specialist UK funds have underperformed - capital returns fell by 0.4% in Q1 - not least because they are significantly concentrated in shopping centres and retail warehouses, with the former netting off the performance of the latter. (Even warehouses - the only performing subsector outside London - began to slow in the last quarter.)

Now, with exceptions, retail looks most promising at the margins. Mixed-used developments in the capital, such as the CPPIB joint venture with Land Securities to develop a five-acre site outside Victoria station, mitigate specific sector risk, even if they are more costly to complete and require more intensive management. Elsewhere, BNP Paribas REIM has identified the trend for consumers to shop within their own neighbourhoods in austerity Britain as an indicator that retail assets in London suburban high street may be less risky than a big town shopping centre.

As the asset manager for the West Sussex pension fund noted last month after acquiring a Tesco supermarket for the scheme, "these days, if you're shopping for retail, you don't shop in Bond Street."

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