“This means the yield compression could slow more quickly than we expect and it will be much more front-loaded,” he said.
“Therefore, returns next year will still be strong, but it will slow down thereafter. It really depends on the outlook for other sectors.”
Looking ahead, it seems the future for UK property might be in the alternatives sector, such as student housing, data centres and even private hospitals.
Mr Rees says: “We think there is an interesting niche in the alternative property sector that has become more prominent in recent years. Here, we have witnessed the emergence of specialist vehicles targeting primary healthcare, care homes and student accommodation.
“What is appealing about these property assets is not only the diversification provided from their low overall GDP sensitivity, but in the case of the healthcare and care home segments, the duration and security of rental income.”
According to Mr Friend, the alternatives are becoming more and more mainstream, as investors become increasingly innovative and diverse in their outlook of what constitutes an interesting investment opportunity.
But he warns: “We’re moving in a market that changes so fast that something that looks really solid can change quite quickly. When you’re investing in specialised markets you have to be careful about your percentage of exposure to any one of those.”
Nyree Stewart is features editor at Investment Adviser
Alternative property: supermarket assets
Chris Urwin, global research manager, real estate, at Aviva Investors, says:
“For property investors who do not have a compelling reason to hold supermarket assets, it could be a selling opportunity given the low level yields have reached and the current market conditions. With the economic backdrop improving, the attractiveness of holding defensive assets such as supermarkets has faded. In the near term, being overweight to defensive assets is likely to be detrimental to relative performance.
“However, not all property investors should turn their back on the supermarkets. Some are likely to remain in high demand from liability-matching investors as they continue to provide secure, long-term income streams with inflation protection that are attractively priced relative to fixed-income assets. While such investors will be concerned if there is further weakening of the covenant strength of the likes of Tesco, the recent fall in bond yields creates scope for pricing to remain very competitive.”
