The performance of property companies has fallen off somewhat over the past year, with those concent...
The performance of property companies has fallen off somewhat over the past year, with those concentrating on the commercial end the worst hit.
According to Bloomberg figures from the start of the year to 15 August, the sector has gained 10.5%, just below the FTSE All-Share return of 10.6%.
As expected, the March rally has boosted returns in the higher beta sectors, raising the IT hardware & software and computer sub-indices by more than 50% over the same period.
But while commercial property companies have suffered in the near term, their medium-term outlook remains positive.
Commercial property has delivered particularly strong performance over the past three years, says Ian Hally, head of property research at Scottish Widows Investment Partnership.
While admitting returns from the sector have slowed somewhat over the past year, Swip still believes its defensive attributes, relatively high yield and security of income will be a draw for investors.
Hally says: 'Total returns this year will not be as strong as last year but it appears the industry's earlier expectation of returns in the region of 2%-3% may turn out to be unduly pessimistic. Rental growth remains weak and office rents in some areas are seeing significant falls.
'However, interest from geared, private investors will ultimately cool as equity markets continue their rehabilitation and interest rates rise.
'Consequently, we expect yields to move out slightly in 2004, prompting average property values to dip somewhat before recovering later in 2005.'
Hermes Property unit trust managers also believes the medium-term economic and financial conditions will create opportunities in property.
A number of market factors are expected to produce solid returns for UK real estate investment, according to the group, including rental growth recovery across all major real estate market sectors.
Hermes also cites strong positive income from historically high real estate yields and increasing liquidity with the broadening of the market investor base.
Of the 35 companies listed in the FTSE Real Estate index, only two produced negative returns from the start of the year to 21 August, according to Bloomberg.
Benchmark Group was the worst performer over that time period, down 14.02%, compared to the top performer, Savills, which was up 49.82%.
Benchmark Group concentrates on commercial property in central London and reported earlier this month that first half net asset value fell 12% as a result of falling rents.
Property in central London, particularly the City, has suffered as a result of cost cutting among foreign companies, particularly American firms, due to the falls of the past three years.
Hally notes: 'The office sector is likely to remain in the doldrums, with vacancy rates rising and rental levels falling in the key central London and M25 office markets. We expect only a slow improvement in returns thereafter. On a medium-term view, we expect commercial property to perform somewhere between the equity and gilt market from current levels.'
Specialist areas of property outperforming.
Long-term outlook remains positive.
Yields are continuing to grow.
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