UK - An increase in the sale of distressed assets could overwhelm the recovery of the UK's secondary property sector, IPD has warned.

According to its latest quarterly briefing for the UK market, secondary assets fell by 1.9% in value, while prime assets saw their value increase by 0.6% - resulting in an overall return of 1.4% for the three months to the end of December.

Malcolm Frodsham, IPD's director of research, highlighted that secondary values still remained more than 40% below their 2007 value.

"This is going to make the continuation of 'pretend and extend' impossible, and increase forced sales, which has generated a lot of interest amongst less risk-averse investors," he said.

He added that, while yields in the secondary sector offered a high premium - at 8.3%, significantly above those for prime assets - banks would be "unwilling" to lend without a secure tenant in place.

"Secondary property generally requires extensive investment and active management before becoming lettable, so it's a catch 22 for investors trying to secure financing," Frodsham said.

IPD said secondary sector performance had been "discouraging" over the past year, with standard retail units losing 2.5% of value, with shopping centres and offices outside the south east declining by 7.7%.

London offices and to a lesser extent retail warehouses were the only two sectors to see growth of 5.3% and 1.4%, respectively.

However, IPD's UK and Ireland managing director Phil Tily said there were reasons to be positive.

"Total return for 2011 was 7.8%, considerably ahead of equities at -3.5%, while the initial yield, at 5.9%, was well ahead of the premium offered on bonds, at 2.5%," he said. "These factors will keep attracting investors into the market."

Tily said the returns would be a "consolidation to the market as a whole", when taking into account the volume of public and bank debt resting on properties in the country.

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