Investors began 1995 by becoming increasingly pessimistic about the prospects for rental value growth in the year. The capital gains in 1994 had been almost wholly attributable to yield falls - partly reflecting the falls in bond yields, but also due to investors' expectations about occupational demand. In the event, rental value growth this year has been very subdued and even the best performing sector, offices, has been showing lower growth in the second half of the year. The indices did, however, hide pockets of activity: some regions produced very acceptable rental value growth, whilst at a locational level there was strong evidence of the much-discussed polarisation effect. Taking into account yields, total returns were better at both ends of the spectrum; high yielding locations benefited from the income stream, and the lower yielding typically provided the best rental value growth.

The window of opportunity for property companies to raise equity on the stock market had, by the beginning of the year, firmly closed. Nevertheless, a number of those which had raised capital were still (very selectively) acquiring higher yielding investments. This continued throughout the year but the pace gradually slowed. Spurred on by the bearish comments of the equity analysts, the property companies' share prices declined in the latter half of the year, leaving those companies who were able to, emphasising their non-property activities.

In their asset allocation exercises at the beginning of the year, some institutions took a bullish view of UK equities and a correspondingly bearish view about property; they decided to re-weight accordingly. Where the decision was implemented at an early stage, the organisations can congratulate themselves on a shrewd tactical move. The overall net result was institutional disinvestment from the market during the year and a continuation of the trend of rising yields which had started in 1994.

It will be almost six months before we know for certain what the IPD total returns from property have been in 1995. Undoubtedly, the asset class will have under-performed both equities and gilts, and we see no reason to shift from our previous view that total returns will be in the region of 3%.

Anecdotal evidence indicates that void levels fell throughout the year, suggesting improvements in tenant demand. The greatest take-up appeared to be in the industrial sector (despite the increasing level of voids indicated by IPD), although there were significant lettings of the better quality office and retail space. Lease lengths were still typically between five and 15 years, with break clauses remaining the norm at the longer end. There were, however, some marginal decreases in the incentive packages offered by landlords.

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