In the residential market, the latest RICS survey of the housing market reveals a marked slowdown in prices. Although house prices rose for the sixteenth consecutive month in February, the pace of increase slowed to the lowest since last May.

RICS spokesman Ian Perry notes: ‘Three interest rate hikes have begun to weigh heavily on buyer affordability. The interest rate rises have started to worry would-be buyers, with many concerned that they will be unable to meet mortgage repayments. Affordability for many will continue to decrease in the coming months as the January rise – and further rises – take effect.’

‘Bullish market conditions still prevail in the South East, Scotland and Northern Ireland, but at the same time prices have stagnated in the Midlands. However although market conditions remain tight, greater awareness of HIPS in the run-up to their introduction might push more property onto the market in the coming months, increasing choice for the short term.’

This view is borne out by Martin Ellis, chief economist at HBOS, following the publication of the Halifax House Price Index for February. According to the Halifax figures: ‘House prices increased by 1.8 per cent in February, leaving the annual rate of house price inflation unchanged at 9.9 per cent for the third successive month. On a quarterly basis the rate of house price growth has more than halved. Prices rose 2.3 per cent in the past quarter, following 4.7 per cent growth in the previous three months.'

He adds: ‘A shortage of both new and second-hand properties available for sale has continued to push house prices up so far in 2007, particularly in London. However, there are some signs emerging that the increase in interest rates since last summer is dampening housing demand; but this is yet to feed through to house prices. At the same time, pressure on householders’ finances due to negative real earnings growth, higher interest rates and above-inflation council tax rises are likely to curb housing demand, resulting in a gradual slowdown in house price inflation later this year.’

At the same time, the opportunities for property investors looking towards Europe are growing dramatically. Tim Francis, director of European strategy and research at Invista Real Estate, reports that: ‘Yield compression across Continental Europe has changed the dynamics of the real estate investment markets to the extent that we now favour the more established markets, underpinned by the larger economies such as France and Germany. We are also actively seeking to add further assets in Scandinavia and Southern Europe as the property markets respond to improving economic conditions.'

He adds: ‘We believe that the Continental European real estate market is becoming more sophisticated, as cross border transaction volumes increase and transparency improves. We target those countries with the best combination of entry cost, asset management opportunities, transparency and liquidity, but we are wary of parts of Central and Eastern Europe where prime yields are now close to those in the West. In our view these yields no longer reflect the additional market risk of investing there.'

Similar arguments apply in the commercial property market. Nick Greenwood, chief investment officer at iimia, reports that his funds have been moving out of the UK commercial property market and into Europe and Japan. ‘UK commercial property has been driven higher by the focus on asset allocation decisions and interest rate rises. Our decision to sell UK commercial property has been based more on the attractiveness of other markets, rather than a dislike for the UK.’

He adds: ‘The European and Japanese commercial property markets look more appealing. For example, retailing in Germany is benefiting from rising inflation and longer opening hours. Also, the introduction of Sunday trading has increased the value of retail property elsewhere in Europe. Japan has been in recession for 15 years and, as the economy normalises, we believe the higher capital growth and higher running yields are only beginning to start their recovery.’

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