Economy Economic growth has ground to a halt over the past six months, but the consumer and housing booms continue. During the second half of the year we expect economic growth to return strongly and the booms to ease. However, we have bigger doubts about calming the booms than reviving the economy.
Property continues to outperform equities and gilts in the UK, with a wave of opinion, and more recently some significant action, supporting an increase in property investment and weightings. Almost all property yields are under strong downward pressure, with retail most affected. Rental value growth is still very sluggish in most sectors.
Agriculture property Agricultural
investment yields have generally fallen this year, with supply low and investors attracted by the prospects of obtaining vacant possession on secure tenancies or realising development opportunities.
Residential sales markets continue on at pace, with annual UK growth of 16.5% at its highest level for two years. Price growth in central London is far lower at 4.2% pa, but the central London lettings market is still in decline with rental values falling by 5.2% in the past year.
Last April, Cluttonsâ€™ bearish 2001 6% total return forecast was considerably more pessimistic than many; but with average total returns finishing the year at 6.7%, our forecast was probably the closest.
However, the property investment market has changed dramatically over the past few weeks and has now reached fever pitch. The weak performance of UK equities and the renewed perception that shares are unlikely to deliver significant capital growth to supplement their low dividend yield, has led to an even greater surge of investors seeking property.
For exactly the same reasons, few investors are willing to sell property. This combination has already forced property yields down in many sectors, with further falls also possible. However, owning property will not solve the pension shortfall if bought at a price more likely to invoke capital value falls, rather than gains, when rental growth remains low.
This recent yield change, which we had been factoring into our forecasts as a more gradual effect over the next few years, has led us to revise our property market total return forecast up to 10% this year. There is however a greater degree of risk to this forecast than our more recent forecasts.
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Property-Gilt Yield Gap Set To Close
Property-gilt yield gap (%)