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View the article online at http://citywire.co.uk/wealth-manager/article/a728608

Can UK commercial property still provide an income shelter?

by Eleanor Lawrie on Jan 21, 2014 at 09:35

This demand shows no signs of diminishing, with approximately £1.3 billion worth of transactions pending in the City and Docklands alone in the first quarter of 2014.

‘The market is now entering the era of a return to property fundamentals in light of economic recovery – principally that of property rental growth, with a controlled supply pipeline and increasing occupier sentiment, decision-making and demand,’ said Bill Tyser, head of City investment at Cushman & Wakefield.

But while overall the asset class looks healthy going in to 2014, he noted some observers are concerned the market now looks ‘opportunity constrained’ due to ‘possible bond yield increases which might result in yield expansion’.

Chris Urwin, real estate global research manager at Aviva Investors, believes despite this strong performance, there is now less opportunity for capital growth in London.

‘Performance remains strong in central London but there is limited scope for yields to fall further,’ he said. ‘With government bond yields likely to rise, we expect central London yields to be on an upward trajectory by 2016. Therefore, over the medium term, we continue to view central London markets as relatively unappealing on a risk-adjusted basis.’

London rental looking good

Phil Clark, Kames Capital’s head of property investment, is also looking to diversify into regional assets to find returns. Conversely, he believes rental growth in London could be a potential highlight of the property market in 2014.

‘The predominant investment themes of 2014 look likely to be threefold: strong returns in good quality regional property; increasing investment into ‘alternative’ property sectors; and, perhaps the boldest prediction of all, rental growth to begin to surprise on the upside as the supply of good quality office space diminishes,’ he said.

‘I’d put my money into good quality regional property in the first half of the year and look for a blend of alternative sectors to secure both long term income and diversification. Such sectors still driven by demand include healthcare and student accommodation.’

While momentum within the property sector is continuing to build, a concentration in demand for primary properties and a likely rise in gilt yields mean that managers are looking increasingly to secondary, regional assets to boost returns.

Although prices have risen, capital values are still around 30% off peak levels, leading property managers to suggest there is room for further capital growth, and fears of another property bubble are some way away.

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