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Property stands Strong

The new millennium has been a good time for commercial property. While stockmarkets have been battered by the worst bear market in almost 30 years, property has emerged triumphantly as the best-performing asset class in 2000, 2001 and 2002. However, with recent news focusing on falling rents and decreasing tenant demand, can property continue to shine amidst the gloom?

There is certainly evidence to suggest the next 18 to 24 months may be more difficult for the property market. While global uncertainties have pushed tenant demand down, particularly in the office sector, buoyant investor demand has bid down yields and pushed up prices, to levels which are harder to justify over the short-term. Slower consumer spending may be a concern, not just for the retail sector of the property market, but also for the economy as a whole. It has been the consumer who has been keeping the economy afloat during the last year or so and any retreat in consumer spending could jeopardise the steady economic platform that Gordon Brown has nurtured. However, all is not doom and gloom. Although we, at Swip, are expecting lower returns from property this year and into 2004, we still anticipate a total return of around 5 per cent this year. This may not be as exciting as in previous years but still represents a positive real rate of return. Our central economic case points to steadily rising levels of returns over the next three or four years.

Over the last decade, we have seen steady economic growth in the UK and anticipate further growth over the next five years. A similar period of unbroken, long-term growth is difficult to find in modern times. Long periods of growth smooth out any short-term ups and downs, avoid the boom-bust effect of economic cycles and helps to reduce any supply and demand imbalances. We also have low inflation and low interest rates – a very different economic scenario from the last property crash in the early 1990s. Development, particularly that of a speculative nature, is rising but from a very low starting point and we do not feel that it will have as negative an impact on the market as previously.

Furthermore, it is worth reiterating why property has continued to be such a popular asset class for investors – a high yield, competitive total returns and with the distinct advantage of low volatility, as well as being a sound portfolio diversifier.

Although there are, indeed, reasonable grounds for caution in the current environment, our long-term view for property remains bright.

With expected total returns approaching 9 per year a year over the next five years, we believe property will still offer competitive total returns and should remain under consideration for investors&#39 future portfolio planning.

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