Property bonds have been an excellent investment over the past five years or so, with the average property bond having risen by 6.3 per cent a year net over five years and 6.8 per cent a year over 10 years.
But what of the future? Most forecasters believe that the all property growth yield will remain at about 7.8 per cent over the next two years or so and that the total return will be around 8 per cent a year although next year it could be as low as 6 per cent due to some rents still falling.
Offices, particularly in central London, have fallen in value but Cluttons, for example, believes that from mid-2005 rental value growth should exceed 5 per cent a year, with 10-15 per cent a year possible in some sub-markets by 2007.
The retail sector has performed very strongly over the past few years and Cluttons believes that this strong rate of growth will slow down, depending on the extent of any reduction in consumer spending. Retail warehousing on the other hand, is likely in Cluttons' opinion to outperform all other sectors between 2004 and 2007.
Cluttons expects that industrial property will continue to provide safe and strong investment, with returns of 8, 9 and 11 per cent over the next three years. This is because it believes that industrial rental values will show low, steady rental growth supported by an improvement in the manufacturing sector, especially as low building development levels are forecast.
Rental values of industrial property in London and the South-east will probably grow at a faster rate than average. Overall, property bonds are likely to outperform gilts, with much lower volatility than equities, although I believe that, at current levels, equities are still a good investment and will be the best performing asset class over the next three years or so.