By Marcus Leach

Despite the appearance of relative price stability with little change in capital values over Q1 2011, the UK property investment market remains highly stressed, according to the latest Real Estate Investment Forecast from Colliers International, with demand for institutional grade assets outstripping supply by a wide margin.

Foreign and domestic funds are well capitalised and are looking to increase exposure to property to diversify investment portfolios. Foreign private investors continue to pursue ‘safe haven’ and ‘wealth preservation’ strategies in response to political and economic instability worldwide.

IPD reports that total returns for All Property reached 15.1% in 2010, mainly in response to yield driven capital growth. Equivalent yields fell by 70 bps from 7.8% to 7.1%, generating capital growth of 8.3.

In 2011, total returns are forecast to fall to 8.0% as limited yield compression on the basis of fewer prime transactions means that capital values will grow by only 1.8%. Gilt rates are expected to remain low in 2011 and 2012 and will give scope for further yield compression.

Dr. Walter Boettcher, Director of Research and Forecasting at Colliers International commented:

“Prime Central London offices are still a central target of institutional investors, both domestic and foreign. Foreign investors continue to take the 'lion's share' of the Central London market by outbidding domestic investors.

“The retail sector is subject to serious downside risks in the short term. Household spending is falling as real disposable income contracted on an annual basis in 2010 for the first time since 1981.

"Retail property investors are frustrated by a lack of investment grade product. This is true across all sub sectors. A lack of product is driving yields lower by virtue of intense competition for assets that do come to market.

“Investor interest in the industrial sector is focused on prime retail distribution warehouses, especially those let to supermarket chains with RPI-indexed leases, and South East based multi-let industrial parks. Both are perceived as offering secure income and are much sought after by UK institutions.”