AXA Real Estate Investment Manager’s Alan Mooney, Head of UK Research & Strategy, identifies trends and key themes for the UK property market in 2007:
“2006 is shaping up to be another good year for property. After strong returns of 19.1 percent in 2005, total returns for the first three quarters of 2006 stood at 13.9 percent with likely returns for the year of between 17 – 18 percent. As in the previous year, the strong performance of the property market was driven by downward yield movement as the volume of liquidity continued in 2006.
There is, however, a growing sense of caution in the market, particularly in relation to secondary assets. Anecdotal evidence suggests that the market for such property is now thinning, with the number of bidders for smaller secondary lot sizes reducing and properties taking longer to sell. Although prices have yet to be fully affected, there are early signs of easing in the secondary market. We expect this cautious mood to affect buying intentions in 2007.
There are several contributing factors which could potentially limit further positive yield movement in 2007. These have been identified as:
· Pricing issues in the market, in particular the upward trend in base rates further eroding property’s yield premium
· The first signs of nervousness amongst debt backed investors
· An increasing resistance on the part of investors to prime yields
· Early tentative signs of the unwinding in the compression of the yield gap
Further downward yield movement is likely to be limited to those property types which can demonstrate substantial potential rental growth.
In the occupational market, central London offices should continue to show strong rental growth but we expect there will be increasing concerns about this market as the amount of speculative space under construction continues to grow.
With returns likely to be driven by rental growth rather than yield compression, we expect the UK market to deliver total returns in the high single digits in 2007”.