LONDON-Fund manager F&C Property Asset Management expects British commercial property to produce total returns of 12% to 13% in 2005, but there may not be the rental growth investors had expected. "There is some concern that the investment market has run ahead of itself this year," F&C officials say. "Prospects for further yield compression are limited, and economic-growth rates would be unlikely to stimulate rental growth significantly. "If some buyers are found to have overpaid, there may be some adjustment to come."

UK commercial property, according to Investment Property Databank, produced total returns of 4.5% in Q2 of this year and 17.5% over the past 12 months. For the first time in a year, it lagged UK equities with the FTSE All-share index returning 18.7%. But F&C notes that over three, five and 10 years, commercial property has outperformed both stocks and gilts as money has flooded into bricks and mortar.

The fund manager expects retail property to deliver the best returns at 13%, office to deliver 12.4% and industrial 12%. Over the five-year period from 2005 to 2009 it forecast average returns of 9.4%.

F&C spokespeople say the British market continues to be buoyant with about euro 63.77 billion ($77.94 billion) invested in commercial property in the past year, some 25% higher than a year ago. Average UK transaction yields fell to 5.7% at the end of June compared with 6.1% at the end of March.

While retail continues to be the top performing property sector, with annualized returns of 17%, the fund manager sees this growth slowing over the next few years. "While some of the recent gloom may be overdone, the town-center element, in particular, could lose some momentum by the end of the five-year forecast period," they say. The fund manager added that, while UK offices have staged a marked recovery on the back of strong investment demand, occupier demand is still muted, and this could impact rental growth.