Property returns improve sharply

COMMERCIAL and industrial property in the UK is showing a positive return for the first time in more than three years, confirming the stirrings of recovery in the market.

The monthly index compiled by Richard Ellis, the surveyors, shows a dramatic improvement in June. Angus McIntosh, research director, says: 'The all- property total return rose to its highest level in three and a half years, reflecting the greatest monthly increase in the history of the index. This is one of the first clear indications that investor confidence is returning.'

Rents, particularly of London offices, are still declining, although at a slower rate, but yields have declined by up to 0.75 per cent in the past three months, providing investors with substantial capital gains.

The improvement has been across the board, but the biggest increase, 3.4 per cent in June, was in the office sector, which beat commercial and industrial property for the first time since March 1989, thanks to a hardening of investment yields, especially in central London.

For months, UK and foreign, especially German, investors have been buying office properties let on long leases to reliable tenants. Now, according to Mr McIntosh, 'a select handful of institutions are getting bolder and looking at retail and office developments which are not necessarily fully let'.

They are being joined by the property companies that have raised several hundred million pounds in rights issues over the past few months and are looking for high-yielding properties.

The strength of the market was confirmed last week when Postel, Britain's largest pension fund, bought control of Greycoat, the troubled property developer, as a means of acquiring its portfolio. But analysts are cautious about the recent improvement in values.

John Atkins, of UBS, says: 'Much of the rise since last autumn was not because asset values were increasing but because the sector was yielding 80 per cent more than the market at the time. Because rents will not be rising, the companies' income will be largely fixed for the next few years.'