The UK property market is at the start of a period of sustained growth with annual total returns pea...
The UK property market is at the start of a period of sustained growth with annual total returns peaking at 18% for 2006, according to the ING Group. Its property advisory arm - Baring, Houston & Saunders (BH&S) - has based this prediction on continued low interest rates and inflation over the next 10 years.
Ian Whittock, head of research at BH&S, said: "Assuming the adoption of the euro by the UK in 2005, its effects on interests rates will be the key economic feature of the next decade and will have a profound effect on the property market."
Interest rates have been at their lowest in 30 years throughout the 1990s, with base rates falling to 5% early this year. However, Euroland rates were even lower, sitting at 3% while the UK's rose to 5.5% in November despite only marginal differences in inflation rates.
The BH&S research suggested that if the UK does adopt the euro in 2005, rates will drop to 4%, making gearing on investments more attractive. This should stimulate economic growth but inflation will be kept in check, the group predicted.
Increased economic activity would cause a rise in occupational demand for property and rental values could then rise steadily above inflation.
Whittock said: "Within the UK economy, some regions have been growing faster than others. The first decade of the new millennium will see the South East region grow at an average rate of 2.7%pa, well ahead of the North region, which will see an annual average growth rate of 1.7%.
The group does not expect the Government's target of 60% of the 1.1 million homes that are needed to be built in the South East region by 2016 can be put on brown field sites. It concluded this will result in increased land values in the South as well as increased rental values comparative to other regions.
BH&S also said that the pensions market will have a large impact on the growth in the property market. As the UK and Euroland move away from state pensions, private pension schemes will see growth leading to investment pressure on investment asset values, including property, according to the research group. This should be particularly beneficial to properties that have been historically sensitive to interest rates.
Changes in transportation will be another positive factor for the market. BH&S anticipated that between 2000-2010 the Government will aim to reduce dependence on cars. This will lead to an improvement in public transport and lower costs. These types of changes will affect the relative value of different property types.
Whittock said: "Property located close to good public transport connections, particularly interchanges, will perform well, driven by demand for occupiers and their employees who will increasingly shift to public transport."
While its outlook for the UK market is bullish it is in many ways a rerun of what is already taking place in Ireland.
Whittock said: "Between 1991 and 1998 the Irish economy grew at an average rate of 8.3% per annum. The resultant impact on occupational demand for property helped annual rental growth reach over 15% in 1998."
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