UK real estate recovery to stall, says IPD

UK - The rally in the UK real estate market appears to have run its course, according to latest figures from Investment Property Databank (IPD).

The IPD UK Quarterly Property Index for the second quarter of 2010 suggeste that both property yields and rents were set to plateau going forward.

Malcolm Frodsham, research director at IPD, said: "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."

Frodsham was speaking to an audience at IPD's quarterly breakfast briefing in London, where it was revealed that UK yields fell 68 basis points in the first half of 2010, following falls of 106 bps over the preceding six months.

Running in tandem with the yield compression has been a period of nine consecutive quarters of rental decline, amounting to a 10% fall.

"We have probably seen the peak of the 12-month returns at 25%," Frodsham said. 

"The yield rally has come to an end, with moderation across all sectors."

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 said: "A period of muted rental movements and little further compression in yields creates a dilemma for investors seeking to outperform the index.

"Do they 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?"

He said the position so far was "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," he said.

Meanwhile, according to the latest Jones Lang LaSalle (JLL) UK quarterly index, all-property total returns slowed to 3.6% in the second quarter against 6.2% in the first quarter.

Capital value growth decreased to 2%, as the pace of yield compression continued to diminish.

JLL's 'style index' continued to show discrepancy in investment performance between prime and secondary assets.

Mike Penlington, director in JLL's valuation advisory team, said: "We expect price discrimination to remain substantial as the weight of money that fuelled investor demand at the start of the year tails off.

"Investors will try and identify opportunities in a market where rents and values for assets in weaker locations will remain under downward pressure."