Cluttons Daniel Smith - General -

Date: 08 Sep 1998

Cluttons Daniel Smith Forecasts Investment Property Sector About-Turn

In its Quarterly Property Market Update, Cluttons Daniel Smith predicts that the present hierarchy of property sector total returns at mid 1998 could well be reversed by the year end if present trends continue. This would imply that retail property is outperformed by industrial and that offices jump from third to top performing property sector in 1998. Annualised data from the first six months of 1998 indicates that the total return to 1998Q2 is 15.9% pa for industrial compared to 16.1% pa for offices and 14.1% pa for retail.

Further to Cluttons Daniel Smith's prediction six months ago that the second half of the year would see a pick up in property investments brought to the market, we believe that a number of institutions are likely to view the next six months as possibly the peak of the market in this cycle. They will therefore regard it as their best opportunity for some time to sell in a reasonably buoyant marketplace.

Despite some concerns about future rental growth, the Quarterly Property Market Update indicates that the market is presently well balanced and that property is still a relatively attractive asset class providing an increasingly important and reasonably secure income stream.

Neil Chegwidden, head of research at Cluttons Daniel Smith says, "We believe that the property investment market has recently tilted in favour of buyers who have become more selective and price conscious as uncertainty in the economy has filtered through to question marks over future rental growth. This, in turn, has served to ease the downward pressure on yields, and only higher quality product is selling quickly."

Cluttons Daniel Smith QPMU/2

Over the last quarter property yields have again fallen marginally, by 0.1%, in 1998Q2 to stand at 7.9% on average, still well above gilt yields, which were 5.6% in late July.

Recent evidence suggests that a number of investors have trimmed back their target rates of return to levels more in line with our suggested rates of 8%-9% pa. However, as investors have begun to reduce their expectations of rental growth, Cluttons Daniel Smith does not believe that lowering target rates of return will lead to much downward pressure on yields.

Cluttons Daniel Smith's report indicates that the rental growth cycle in the retail and industrial markets appears to be nearing its peak with signs that a few investors are becoming concerned over future rental growth prospects. However, occupational demand is still at a healthy level and the firm believes that the low levels of development at present will play a key role in maintaining a reasonably balanced property market during the next part of the cycle.

Office Investment
Office rental growth, at 8.7% pa in 1998Q3, is the highest of the three main property sectors. The growth rate continues to rise, albeit at a slower rate than earlier in the year, and is now at its highest level since September 1990. Central London is experiencing growth of close to 20% pa on average although there are already signs of these unsustainable growth rates slowing. Cluttons Daniel Smith further believes that some investors may view the coming months as an ideal opportunity to sell, thereby increasing the choice of properties for buyers.

Cluttons Daniel Smith QPMU/3

Retail Investment
The all retail property rental growth rate fell slightly during 1998Q2 to finish at 6.1% pa on average and looks to have reached its peak for 1998. At mid-year the IPD monthly data suggests that the end of year rental growth rate for the Annual Index will be in the region of 5-6% pa which will feed through to an annual total return for retail of 14-16% pa. Given current trends, retail could turn out to be the poorest performing property sector in 1998.

Industrial Investment
There are signs that industrial rental growth has peaked with the annual rate rising over the second quarter but failing back from a high in April of 4.3% pa to 4.1 % pa in June. Investment demand is strong for good quality industrial estates with investors attracted by a combination of good initial yields, active management opportunities and relatively little new development in the pipeline.

Analysis of recent trends in the IPD monthly data suggests that industrial property is outperforming retail but marginally underperforming office property during the first six months of 1998.

Cluttons Daniel Smith's Quarterly Property Market Update is available from the research department on 0171 408 1010.

Where do I go now?: » View the latest news items » View the news archive » Subscribe to Weekly Property Newsletter » Submit news