UK yields and rents 'heading for the doldrums': IPD

UK property yields and rents appear to be heading for the doldrums as the influences driving capital movements plateau, delegates at the IPD/IPF/PDIG Quarterly Q2 Briefing learned on Wednesday.

At the breakfast briefing, held at Berwin Leighton Paisner's London Bridge headquarters, IPD research director Malcolm Frodsham explained to delegates:
'The early rapid recovery is behind us now, which suggests we may be heading for the doldrums or a convergence across markets - income returns will likely make up the vast bulk of investor returns in the second half of the year.'

According to the IPD UK Quarterly Property Index, yields have fallen 68 basis points in the first half of 2010, which comes after steeper falls of 106 basis points over the previous six months. Overlaid upon this, has been nine consecutive quarters of rental decline, amounting to a -10% fall. 'We have probably seen the peak of the 12-month returns at 25%; the yield rally has come to an end with moderation across all sectors,' Frodsham added.

The net effect of the yield and rental movements was a second quarter capital growth of 1.8%, with a compounded 14.6% capital return over four consecutive quarters of positive growth. Frodsham added: 'A period of muted rental movements and little further compression in yields creates a dilemma for investors seeking to out-perform the index: enhance the security of income with longer unexpired lease terms and secure covenants or edge up the risk profile to receive a higher running yield?'

'The position so far is very segment-specific. The better (or less negative) rental value growth and more secure income has enabled lower equivalent yield standard shops, offices outside of central London and industrials to outperform assets in the same segment with higher equivalent yields.'