Falling yields, which have been the market's main driver, slowed their rate of descent in August whi...
Falling yields, which have been the market's main driver, slowed their rate of descent in August which in turn tempered the return of IPD Monthly Index to 1.1%. Over the month, office properties showed the greatest capital growth, although the higher income yield from industrials meant the two sectors returned the same. Retail properties had a quieter month.
We see scope for further downward yield movement over the remainder of 2006, with yields stabilising in 2007. Offices look to continue their outperformance – driven by the strong rental growth prospects for central London. We also see value in the broader south east of England office market and in selected regional centres.
Surprisingly, the retail sector has remained robust despite the various headwinds it has faced.
Future rental growth prospects remain in doubt though. This is evidenced through a combination of rising cost pressures (rents, rates, energy, staff) and adverse structural trends (internet penetration, competition from supermarkets). Add uninspiring flat consumer spending forecasts and relatively high town centre construction levels and it's easy to see why the sector is thought most likely to underperform overall.
Some retail warehouse sub-sectors do offer some positive news.
The office sector's recent performance has reinforced expectations that it will enjoy a period of outperformance.
Rental growth is now higher than the other sectors, led by the central London markets. Inward yield shift continues to drive capital value growth although this effect now appears to be slowing. Despite the recent sharp decline, office yields still look reasonable value on our indicators, although no longer cheap.
The industrial sector is the weakest sector for rental growth and its outlook continues to appear unexciting. Yields still look relatively expensive in historic terms and there seems limited scope for further hardening.
The ResolutionAsset UK Property fund aims to invest 100% of its assets directly into bricks and mortar and no other asset classes. This gives the fund the advantage of true diversification.
The commercial property marketplace is very competitive with more buyers than sellers. This lack of supply is pushing up the cost of buying commercial property. The UK Property fund has a mature and balanced property portfolio both in terms of sector and geographical spread. It has robust covenant strength and a lower than average number of vacancies. This year, we have been very active in the market acquiring 10 properties worth over £155m. This purchasing power has been made possible through the significant inflows of cash the fund has enjoyed from its various distribution channels.
Offices appear best suited to outperform over the medium term, while high street retail is most at risk of underperformance although this may present opportunities if market pessimism is overdone. Industrials continue to provide funds with a relatively attractive income yield but growth prospects are limited. Geographically, the south east markets offer the best opportunities: higher economic growth prospects and will benefit most from investment linked to the 2012 Olympics.
Our buying priority remains offices: in addition to the key central London sub-markets we are also looking at the broader south-east of England market and specific regional centres. The outlook for the commercial property market remains attractive as the fundamentals look more than supportive. Although returns will slow in 2007 they should continue to be appealing to investors. In light of this the fund is well positioned going forward.
