Although the UK manufacturing sector is technically in recession, consumer spending is still growing, and the housing market remains strong with low interest rates leading to a 16.8% increase in prices across the UK in the past 12 months. These conflicting indicators are reflected in the varying performance of different property sectors, said LSH.

At the end of 2001, average rental growth for the whole commercial property sector had fallen to 2.5%, down from 5.9% in the preceding year. Retail rents finished the year lowest, down to 1.8%. Industrial rents halved in 2001 down to 2.4% and office rental growth slowed from 9.8% to 3.5%. Reflecting this total property returns fell to 7.1%, although they still outperformed equities and government bonds.

Lambert Smith Hampton research head Arezou Said said offices in London and the South East would be hardest ht by the slowdown. 'In the West End, availability of office space has risen significantly,' he warned. 'Occupier demand has slowed and rents have softened and a two-tier market has arisen as occupiers return comparable properties to the Mayfair & St. James' market at a more competitive level. Reduced demand in the South-East should impact on the office market but this will be offset by better performance in the regions.'

Said said that although manufacturing is struggling, demand for warehousing from the buoyant distribution sector is helping to underpin the industrial market, especially in the South-East. And he said continued consumer spending was expected to boost demand in the retail sector.

But he forecast that, for property, the worst could already be over. 'The slowdown would seem to have reached its trough. We expect the outlook to improve gradually in 2002,' he said.

Instant Insights /

LSH Looks for Brighter Property Performance in 2002

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