Is investor enthusiasm for residential property faltering? Five interest rate rises in 12 months have started to have an impact on residential property values, with average house prices falling more than four per cent in July, leading to predictions of more pain to come.

Online property specialist Landlord.co.uk reports that there are indications that some landlords are ‘panic selling’ in anticipation of a fall in property values over the coming winter.

Tim Warrington of Landlord.co.uk says, ‘Our in-house research suggests that many of the 14,000 landlords registered with our site are selling their properties at once. It seems that UK landlords are looking to buy more property but a lot have decided to cash in on their domestic investments, paying off debts and trying their luck abroad.’

Cashing in

He adds, ‘Basically, UK investors are bailing out of the UK and hitting the foreign markets as quickly as they can. But too many landlords selling in the UK could send the property market into freefall, as many properties in the buy-to-let sector are going up for sale. We can understand landlords wanting to cash in on the money they have made over the past few years. Unfortunately, their desire to dump their UK properties may start a domino effect.’

Investors in commercial property should also be looking overseas, according to property fund of funds manager Seven Dials, which has compared returns from UK equities with those from several different international property markets, over the past ten years.

‘The clear message from our table is that if these correlations hold true in the future, then international property markets offer very large diversification benefits to UK investors,’ argues Seven Dials director Simon Critchlow. ‘Our view is that UK direct property is currently not offering great diversification benefits versus UK equities. European commercial property, by contrast, offers much greater diversification benefits but requires billions of euros in property asset holdings in order to achieve a fully diversified state.’

Asian attraction

And it is not just Europe that is attracting attention. Asia is also seen as a prime location. Roger Dossett, head of property fund management at New Star, reports that the group’s International Property Fund has been actively seeking assets in the region.

He explains, ‘With economic prospects strong and investor confidence growing, Asia has become an attractive centre for prime property investment. The direct commercial property market in Asia remains brisk, with both the number and value of purchases by overseas investors increasing. Rental performance in the region has been strong, with Singapore leading the way generating a 53.6 per cent year-on-year rental increase.’

He adds, ‘Strong rental growth is forecast to continue in these markets, as a scarcity of supply and high levels of demand drive rents higher. In the first half of 2007, the average capital value of prime property in Hong Kong rose eight per cent. Prospects for Japan are arguably even more attractive because Japan is at an earlier stage in its property cycle. The country’s expected economic resurgence makes it an attractive centre for investment, with key cities, where land is at a premium, such as Tokyo and Osaka, set to benefit.’

Dossett concludes, ‘The broader Asia Pacific region has benefited from this strong growth in Central Asia. New Zealand’s property market, for example, has been resilient, with rents rising, yields firming and vacancy rates falling. Office vacancies in Auckland’s Central Business District are now at the lowest level since the 1980s.’

This article is from the October 2007 issue of What Investment.