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LONDON-Savills Fund Management now expects property to generate a total return of 8.5% during 2003, made up of an income return of 7.0% and capital growth of 1.5%. But with interest rates likely to rise it does not expect a repeat performance during 2004.

The strong performance comes at a time when rents are static or even falling in offices and industrials, but investors seem to be ignoring this and are bidding down yields on properties with secure income streams. Retail is likely to be the top performer in 2003 with a projected total return of 12.5%, followed by industrials on 9.9% and offices on a lowly 2.2%.

However, the money markets are now forecasting an imminent rise in interest rates, which will make it more difficult for debt-driven purchasers to buy at the keenest prices. As a result Savills is forecasting that total property returns will fall back to 7.0% over 2004.

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