Schroders: How resilient is secondary property?

There are three main reasons for this: secondary property offers a higher income return (6.4% at 2014 Q2) than prime property (5.1% at 2014 Q2)1; secondary properties are now starting to benefit from increasing tenant demand arising from the economic recovery in the UK and, finally, against this backdrop, investor appetite for properties carrying higher levels of risk is increasing. Looking forward, our central view is that secondary property will probably outperform prime over the next few years as the deficit in rental growth narrows and as the gap in yields shrinks. That would broadly replicate the patterns seen during the long upswing from 1993 to 2006. This in turn assumes that the UK economy will continue to grow steadily and that long-dated gilt yields do not increase to more than 3.5-4.0%2  over the next few years. It is of course possible that our assumptions are wrong and that either the UK economy stalls unexpectedly, or that long gilt yields jump to 5%, or even higher, for various reasons: inflation might be higher than anticipated3 , or the unwinding of quantitative easing, which is unchartered territory for central banks, might destabilise bond markets. If we consider these alternative scenarios then which type of property would be more resilient – prime, or secondary?

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