Property outperformed bonds which had returns of 7.4% but was in turn outperformed by equities, which had returns of 22%. Property shares achieved the best returns.
Investors--particularly pension funds--have poured billions of pounds into real estate in recent years the appeal being the ability of property to deliver strong returns while being less vulnerable to shocks than other assets. Demand for property is helping to drive markets such as property derivatives, and the British government is planning this year to legislate for REITs.
Office returns topped 20.4%, followed by industrial returns of 18.4%. The retail sector fell from returns of 20.5% in 2004 to 18.8% last year. The report added that differences in the performance of sectors narrowed sharply because of the weight of money pouring into property. The gap stood at just 2% compared to 5.3% a year earlier.
Average yields fell to 6% from 6.6% in 2004 and are now at the lowest level ever recorded by IPD. This means yields are now less than 2% higher than those paid by 15-year gilts. The report adds that a gap of 2% is typically seen as a reasonable risk premium for holding property. This would suggest, it goes on to say, that property assets , suggesting brick-and-mortar assets could be vulnerable to economic shocks like higher interest rates.
"A fourth unprecedented year of accelerated yield compression, in the context of rental growth which still no more than matches inflation, leaves the market vulnerable to anything which may threaten such a fragile yield equilibrium," Ian Cullen, co-founding director of IPD, says.
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