LONDON-Property yields last month dipped to 5.9%, the lowest in 14-and-a-half years, according to the latest Investment Property Databank report. But YTD, the same commercial property investment returns in Britain hit 16.6%. In contrast, equities have produced returns of 9.6% so far this year. Returns like these have drawn a wide range of investors, and this demand when coupled with limited supply has pushed the all-property initial yields down. The IPD report also noted a marked improvement in returns in office investments from 2.7% in 2003 to 13% so far this year.

Figures like these have drawn the attention of the Bank of England, which earlier this week warned banks against risking too much on property. Half of all new British corporate lending went to the commercial property sector in the year to September. “The sector now accounts for more than a third of the outstanding stock of lending to UK non-financial firms,” the BOE said in its Financial Stability Review. “That raises the issue of whether lenders are sufficiently diversifying their UK corporate credit risk.

“Property yields have continued to decline,” The BOE continues, “and, in light of recent weak rental growth and high vacancy rates, it is unclear whether investors’ expectations of rental income will be met.” Mark Callendar at IPD suggests that property yields could fall further still next year with the weight of money being thrown at the sector, unless a rally in the equities markets offers an alternative to investors. “My guess is that until the stock market recovers and the hot money goes back into equities, some of it will continue to leak into property,” he says. “The actuaries who drive investment allocations by the big funds are saying up your exposure to commercial property.”

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