A soft landing for UK commercial property has been predicted by economist Sabina Kalyan (right) of Capital Economics. She was speaking at an Investment Property Forum (IPF) breakfast meeting on the subject of whether yields are too low.
Ms Kalyan claimed that UK commercial property was unlikely to be facing an imminent crisis.
She thought that property is currently valued fairly compared to other asset classes, making a soft landing probable after 2005.
But Ms Kalyan believed that 2005 would turn out to be the last year of high property returns, with capital values static between 2006 and 2009. She predicted that some commercial sectors, such as high street shops, secondary industrials and regional offices may well see falling prices.
Ms Kalyan thinks there is likely to be convergence between market sectors which should bring total returns back into line with long term averages, assuming low levels of inflation continue.
But she added that in comparison to 2005’s likely real return of 13%, this could feel like a nasty slowdown. She said: “While commercial property now looks modestly over-valued against equities, property yields still look attractive compared to bond yields. Capital Economics believes interest rates are likely to fall further - given weakening economic conditions - reinforcing the attractiveness of the yield gap and lowering the cost of funding property.
“And UK institutions are likely to continue increasing their allocations to property in 2006, only restricted by the lack of available stock.”
Robin Goodchild, head of European strategy at LaSalle Investment Management, said that although many market players were nervous about historically low yields, they should be concentrating more on the relativities with bonds, which remain favourable.
Paul Kennedy, head of European research for Invesco, saw some clouds on the economic horizon. He thought increasing oil prices may put pressure on inflation, especially if moves towards global protectionism accelerate.
He said the under-funding of UK and overseas pension funds, combined with the increasing transparency and accessibility of the sector, was enhancing demand for property investments. He warned that this may lead to an excessive fall in yields and threaten the sector’s current good reputation.