Ignis has warned investors in its £510m UK Property fund to expect a short-term drop in capital values but believes returns will remain positive.
The firm says given the short-term disconnect between capital value growth and rental value growth, yields for prime stock run the risk of over-correcting in the short term leading to a moderate retrenchment in capital values.
Ignis says the situation has been exacerbated by an insufficient supply of quality properties to meet demand, with 20% of the fund currently being held in cash.
The company remains "very positive" on commercial property in the medium term and predicts returns of between 8% -9% per annum. Even in the short term returns will remain positive, it adds.
Ignis says it expects its warning to lead to reduced inflows in the short term but felt it appropriate to inform investors and advisers of its forecast.
"UK property as an asset class has seen significant inflows in recent months, with investors attracted by the high and relatively stable income and positive medium/long-term outlook," the briefing note says.
"Levels of demand have, however, not been matched by the supply of the institutional grade properties to the market that Ignis believes are suitable for the fund."
"In addition, given the short-term disconnect between capital value growth and rental value growth, Ignis also believes yields for prime stock run the risk of over correcting in the short term leading to a moderate retrenchment in capital values. Second dips in value of this nature are not uncommon having previously been seen at this stage in the cycle in the mid 1970's and 1990's.
"While a short-term correction poses little threat to those with a medium to long-term time horizon, Ignis believes it prudent to highlight potential pricing pressures in the current market to both existing investors considering adding to their holding and investors entering the fund for the first time."
