Market Matters Global Property Outlook for 2005 Steve Mallen, Head of Property Research & Simon Bryant, Senior Analyst, Henderson Global Investors   In most mature markets, both direct and indirect property have generally delivered superior risk-adjusted returns over the past 2-3 years, surprising many forecasting houses and leading to a serious re-examination of fair pricing and the role of property in a mixed portfolio. Fair Value? Property has now become a preferred investment medium, after being under-valued throughout the 1990s. In the direct market, large capital volume and velocity has compressed yields and cap rates to historic lows in many markets. In the indirect market, property stocks have received better assessment at stock analyst level and the discount to NAV ratios have narrowed, sometimes sharply. Sector maturity and increasingly positive sentiment, matched with capital and debt pressure, has led to a mushrooming of the derivative and CMBS market in several locations, most notably Europe. Similarly, the volume of unlisted and offshore property vehicles has grown rapidly and the fund of funds concept looks set to be a key market theme at least until the end of this decade. REIT activity picking up In the securities market, the perceived promise of REIT structures in multiple territories has added to positive sentiment over stocks. The established experience of the US and Australia points towards sector expansion on a very large scale, bringing diversification, liquidity and investor efficiency at income level. The more juvenile markets of France, Singapore, Japan and Korea are trending the same way. Deceleration & stability Looking ahead, the pace of yield compression in the direct market is unlikely to be sustainable. With interest rates trending upwards in both the US and the Eurozone, highly leveraged purchases will likely diminish, taking some buy-side pressure out of the market. Capital volumes will remain extremely high by historic standards, underlining the importance of fair value based analysis. The institutional and retail appetite for REIT structures will likely lead to over-subscription and possible short term trade opportunities before the sector expands and pricing norms become established against credible benchmarks. The outlook is positive, although heady returns will probably not be matched in 2005. Conclusion 2005 will be a year of reflection in property. Capital volumes will reduce, although remain very high by historic standards, and yield compression will moderate on prime stock. Income growth will become central to sustainable earnings strategies. In consequence, underlying market fundamentals and valid interpretations of local market cycles will become more important. The proliferation of property stocks will continue, and we expect good performance and a broader range of opportunities in 2005.