Muted UK property market strengthened by global turbulence
07 Oct 2011
The weak domestic economy means returns from UK commercial property this year will be unspectacular, but the asset class may continue to appeal to investors seeking refuge from global turbulence, according to the latest research from real estate fund managers PRUPIM.
Publishing its latest UK Real Estate Perspective report, PRUPIM said total returns from UK property in 2011 would remain muted, with weak occupier demand outside of central London holding back rental growth. However, the report says that renewed alarm about the world economy means institutional investors and pension funds may again be content to play safe and invest in UK prime property.
Richard Gwilliam, Deputy Head of Research at the fund manager said: “We expect unspectacular returns from UK commercial property this year, but investors are currently attracted to the unspectacular. With the current turmoil in Europe, and deepening gloom over the pace of the UK economic recovery, many feel that good quality property investments are currently more secure than some equities investments, which continue to be very volatile, and better value than many bonds vehicles.”
According to the report, the UK prime property market remains two-tiered, with global money pouring into increasingly expensive central London investments while assets outside the capital remain cheap.
Geographically, in spite of weak rental prospects, the unloved office and industrial markets outside of the South East offer perhaps the best long-term value in the UK, due to their elevated yields.
“Investor nervousness about the economy and the financial markets has returned and intensified, and prime property - particularly in London - is being viewed as a relative safe haven. In fact, prime assets could in many cases be seen as expensive over the long term, but we believe institutional investors will remain wary of all but the best secondary assets for the foreseeable future,” adds Richard.
Over the longer term, PRUPIM expects more positive prospects, with a drought in construction and development likely to bolster rents. But the report says substantial capital growth will come only when a real sustained economic recovery drives the rental markets upwards.
“UK commercial property has traditionally provided a return somewhere between bonds and equities, something which it has achieved over the last two and a half years since the stock market trough, and which we think, in the current climate, institutional investors will continue to seek,” concludes Richard.
ENDS
Notes to Editors
PRUPIM is one of the world’s top 20 largest global real estate fund managers by funds under management and is one the top three largest UK real estate fund managers. PRUPIM has around £16 billion* invested in a broad spread of properties across Europe, North America and the Asia Pacific region and is part of M&G, the investment arm of Prudential plc in the UK and Europe.
*at 30 June 2011
For more information:
Paul Griffin, Associate Director, Communications T: +44 (0)20 7548 6976 M: +44 (0)7766 726722 E: Paul.Griffin@prupim.com
