UK - The sharp turnaround in the performance of the UK commercial real estate market is set to continue through the first six months of 2010 although activity will not be smooth, according to Schroder Property Investment Management.

However, the fund manager warned that the outlook did become increasingly uncertain as the market moved into the second half of the year, and predicted further volatility would occur over the next two or three years.

Both William Hill, head of property, and Mark Callender, head of property research at Schroders, said they believe there is sufficient momentum in the investment market to support a further recovery in capital values, with yields continuing to fall in the short-term as rental values are expected to reach a trough.

Hill and Callender said theirs was a divergent view from a more common consensus that capital values will reach a plateau during 2010-12 with total returns settling at 8-10%.

They instead felt performance was likely to be more volatile than many anticipated, with a risk of a modest downward correction in capital values in either 2011 or 2012.

"There is still considerable uncertainty about the outlook for the UK economy and the degree of patience which banks will show to property investors who are in breach of their covenants," said Hill.

"While UK commercial property is likely to perform strongly in 2010, we believe it would be unwise to simply extrapolate that into the future. Investor sentiment is likely to remain unpredictable and we expect property capital values and total returns to continue to be volatile over the next two to three years," he continued.

Callender added: "Although we expect quite a rapid recovery in capital values over the next 12 months, that has to be seen in context. Even if capital values were to increase by 20% between mid-2009 and end- 2010, that would still leave them 30% below their peak in mid-2007."

Hill and Callender's uncertain outlook for 2010 is strikingly different to Schroders' previous house views on the UK real estate market.

In late-2007, the investment manager forecast the market would stabilise in the middle of 2008, but it was not until 2009 that transactions eventually picked up and prime yields reached a peak.

And in late-2008, Schroders predicted the market would not begin to recover until 2010. The fund manager did at the time say there might be some stabilisation as early as the latter half of 2009.