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• Views on the Property Market >
• Current conditions

Operating & Financial Review

Views on the Property Market

The continued pressure of investment demand for UK property has resulted in further tightening of yields and consequently higher values.

Current conditions

Investors across a broad range, including overseas purchasers and new property funds, find UK property attractive because:

• over the last 10 years total returns from property have been higher at 11.2% per annum than those from equities and gilts at 8.1/8.8% per annum
• income yield on property is higher than both gilts and equities, and above inflation
• property returns have been much less volatile
• well let property remains readily financeable with income yield remaining above the cost of borrowing
• property provides diversification benefits in an investment portfolio
• further rental and capital growth is expected.

In addition, readers familiar with the UK real estate market will already be aware of these key structural features:

• lease contracts usually have a term of between 10 and 25 years, regular rent reviews, typically every five years and upwards only, with tenants fully responsible for repairs and insurance
• demand drivers, from the UK’s overall density and population growth, with a growing open market economy and a flexible labour force, particularly in London’s experienced multinational financial sector
• supply constraints due to limited availability of land and a restrictive planning regime which tend to create barriers to new supply and support land values (although the pre-requisite work and costs of submitting planning applications have risen)
• transparency of the market with an established legal and transactional system, open access to land registry and a regulated and established valuation profession.

These current attractions and fundamentals of the market have been and are still resulting in competition between buyers for available property, and increasing upward pressure on market prices. UK institutional weighting to property has been low and is being re-rated, with institutions seeking to match commitments with bond-like income and growth potential. Overseas purchasers represented about one-third of total property acquisitions and European investors are now meeting competition from US and Australian purchasers.

As we anticipated at the interim report, the continued pressure of investment demand for UK property has resulted in further tightening of yields and consequently higher values. This yield shift has affected higher yielding secondary properties to a greater extent than for prime assets, as strong investor demand has led to the greater risk factors in secondary property being heavily discounted. Investors have reviewed their approach to UK property as an asset class and there is now a more favourable appreciation of its merits and investment qualities.