2006 Retail property returns will beat consensus prediction by almost 100% (UK)

Retail property could show returns in excess of 20% in 2006 according to the latest research from leading property consultants, Donaldsons. The firm's bullish forecast contrasts starkly with the IPF Forecasts Survey, which posits a much more conservative prediction of likely commercial property returns of just 11.2%, itself up from the 8.6% forecast at the start of the year.

This will not be the first time that the analysts have been proven wrong. In 2005, the IPF Forecasts Survey predicted total property returns of 10.6%, but, in the event, retail property generated 18.9% (while commercial property as a whole saw a return of 19.1%).

The picture was similar for the preceding year, when the IPF consensus prediction was 9.1%, while the retail sector actually generated a total return of 20.5% in 2004 (with a 18.3% total return for commercial property).

Donaldsons prediction of healthy returns for 2006 in excess of 20% is based upon IPD source data, combined with insight gained from everyday experience of market demand at grassroots level.

Bryan Duncan, Head of Retail at Donaldsons, comments: "Our higher expectation for this year’s outturn is driven by our more enthusiastic view of Retails. This is a sector that is still performing well, despite the doom-mongering, and we remain confident that Retails offer good growth prospects over the course of 2006."

Donaldsons view of the market is substantiated by the weight of money that continues to move into retail property. The firm's latest research figures reveal that since Summer 2005, nearly 25% more net investment has gone into the retail sector than into most analysts' top-rated sector for performance, Offices.

Examining historical figures to the end of the first quarter of 2006, the research reveals that the underlying demand for retail property remained strong, achieving total annual returns of 23.3% to the end of March 2006. These were driven in part by prime retail warehousing, which showed a steep capital value increase of 21.7% and an income return of 4.5%.

Mid and low-yield shopping centres also saw good growth, with total annual returns of 20.0% to March 2006 and quarter-by-quarter improvements. In a sub-sector traditionally favoured by investors, Donaldsons is confident that the remaining three quarters of 2006 will show similar strength and anticipates additional growth in shopping centres. This is due to their income return/covenant spread advantages and natural 'REITability'.

Throughout the last twelve months, returns in the shopping centre and high street shop sub-sectors also remained good. Both categories saw annual income returns of 5.3%, with secondary shop rental values showing continued strength. Rental growth rates of 3.1% and 2.6% respectively contributed to total returns of 17.3% in high street shops and 19.0% for shopping centres.

Bryan Duncan comments: "The good news for investors is that the forecast cyclical downturn in Retails is coming through more slowly and less intensely than expected.
The retail property market remains in good shape, demonstrated by stronger than predicted retail sales results and encouraging annual sales figures from high street names such as House of Fraser, Zara, H&M, Primark and Debenhams. We are also seeing an increasing number of retailers back on the acquisition trail, adding further drive to the market and ensuring that retail retains its allure to investors."

Source: Donaldsons

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