View from City Road: Good and bad property news

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The Independent Online
Reading the runes of the property market has seldom been more difficult. First the good news. In the West End of London, according to Hillier Parker, more property was sold in the first quarter of the year than in the whole of 1992 and, it says, yields have improved by up to 1 percentage point. Property shares have outperformed the market by 20 per cent since the start of the year, cutting the average discount to prospective net asset values to between 5 and 10 per cent, compared with the long- run average of about 25 per cent.

Second the bad news. There have been no significant City lettings to make a dent in the 17 per cent overall vacancy rate. Yields may be hardening but, at an average of 9 per cent, they are still at a premium to long gilts and their historic average.

Behind the conflicting signals is a growing view that the market is bottoming out - and, given that confidence is the key to recovery, that should become self-fulfilling.

Helped by devaluation, British property has become far more attractive to foreign buyers - and almost three-quarters of the West End deals so far this year were by foreign buyers. Their interest is pushing yields down, which in its turn is bringing out the British institutions who want to catch the market before it turns.

Their interest is, however, confined to the prime properties, with blue chip tenants on long leases; the rest of the market will take years to catch up. The same is true among property companies. The financially sound, prudently managed companies have already been spotted - shares in Land Securities, for example, are at a 15 per cent premium to prospective net asset value. At the other end of the scale, investors in companies like Speyhawk and Greycoat have little prospect of any return.

The lesson is that investors are better off investing directly in property rather than buying shares in property companies.