Capital values, which have been the main driver of returns overprevious years, will be the main casualty, with an increase of only0.4% predicted for 2006, compared to 6.5% this year and 11.4% in2005. As a result, yields will "bottom out and edge higher,"according to RICS.


Rising rents in specific markets will provide some level ofcounterbalance, however, with a steady increase of 1.6%, marginallylower than this year and last. But the slowdown in domesticconsumer spending as a result of interest rate rises and a weakhousing market is "a threat to rental growth in the industrial andretail sectors," RICS reports.


This could be exacerbated by any tax rises during the newparliamentary term and any continuing weakness in industrialproduction. Total returns in industrial and retail will fall to7.7% and 5.7% in 2006, from 14.5% for both sectors this year.Nevertheless, RICS predicts sluggish growth rather than a recessionin the UK, with GDP growth at 2.5% for both this year and next.


A robust world economy, on the other hand, as a result of oilprices receding from current highs, will result in corporateconfidence and the real prospect of rental growth in the officesector, particularly in London. Rents will rise by 1.9% in 2006,compared to 1.5% this year, although returns will drop to 6.1% from11.2% as a result of weakening capital values, RICS adds.

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