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LONDON-The rate of rental growth in all commercial property sectors is slowing, and at the same time yields are increasing, according to new analysis from Lambert Smith Hampton. This combination is hitting the overall returns obtained by property investors, but property is still managing to outperform equities and government bonds.

All property rental growth slowed to an annualised rate of 4.3% in the year to July, according to the IPD monthly index, and the slowdown has affected all three sectors. The office sector is still leading, although annual growth is down 7.3%, reflecting lower occupier demand particularly from the telecommunications and IT sectors. However, Lambert Smith Hampton expects the office sector to remain the top-performing sector. ‘whilst rental growth over the next two years is expected to be lower than in the recent past, it is still expected to be higher than either retail or industrial properties,’ says Arezou Said, research analyst at LSH. ‘We expect rental growth to average around 4% per annum.’

In the retail sector, rental growth has fallen to 2.3% in the year to July with retail warehouses performing only slightly better at 2.6%. But LSH’s Said detects some good news for the sector. ‘High street shops and shopping centres are witnessing the first signs of a recovery,’ he says. ‘For the sector as a whole, rental growth is expected to remain modest at around 2% over the next two years, before rising to around 4% to 5% per annum thereafter.’

From the investor’s point of view, the latest IPD monthly index showed all property total returns at 7.9%. Equity returns in the year to July were –10.7% and gilts (government bonds) returned 6.7%. And LSH expects property to continue to outperform other assets, providing a safer and more stable investment medium. ‘Higher rental growth and a hardening in yields should push returns into double digit from 2003 onwards,’ forecasts Said.

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