UK property yields and rents look to be heading for the doldrums as the influences driving capital movements plateau, delegates at the IPD/IPF/PDIG Quarterly Q2 Briefing were told.

At the breakfast briefing, held at Berwin Leighton Paisner’s London Bridge headquarters, IPD research director Malcolm Frodsham (pictured) said the early rapid recovery is behind us and we may be heading for the doldrums or a convergence across markets.

He said income returns will likely make up the vast bulk of investor returns in the second half of the year.

According to the IPD UK Quarterly Property Index, yields have fallen 68 basis points in the first half of 2010, which comes after steeper falls of 106 basis points over the previous six months. Overlaid upon this, has been nine consecutive quarters of rental decline, amounting to a ten per cent fall.

“We have probably seen the peak of the 12-month returns at 25 per cent; the yield rally has come to an end with moderation across all sectors,” Frodsham added.

The net effect of the yield and rental movements was a second quarter capital growth of 1.8 per cent, with a compounded 14.6 per cent capital return over four consecutive quarters of positive growth.

Frodsham said: “A period of muted rental movements and little further compression in yields creates a dilemma for investors seeking to out-perform the index: enhance the security of income with longer unexpired lease terms and secure covenants or edge up the risk profile to receive a higher running yield?

“The position so far is very segment-specific. The better (or less negative) rental value growth and more secure income has enabled lower equivalent yield standard shops, offices outside of central London and industrials to out-perform assets in the same segment with higher equivalent yields.”

Global property derivatives trading volumes sunk to their lowest quarterly level for over four and a half years, with just GBP300m executed in 62 trades, according to IPD. The trading activity was split 50 UK trades worth GBP246m and 12 trades worth GBP54m against French indices.

Phil Ljubic, head of property derivatives trading at RBS, said the third quarter looks very encouraging.

“We are seeing groundswell of activity over last month with more trades in first month of Q3 than we saw over the entire second quarter – that is, more than GBP250m worth of trades. So we are seeing some quite big volumes. They consist mainly of all property trades, but we are looking to do more sector and sub-sector, particularly with hedge funds.”