THE TARGET RETURN ON UK PROPERTY INVESTMENTS

It is conventional to assume that property investments in the UK are priced on the basis that investors require a total return approximately 2 per cent above the current redemption yield on long dated gilts. Some yield premium seems intuitively appropriate due to certain apparent disadvantages of property relative to gilts, eg higher risk, poorer liquidity and greater transfer and management costs. However, the purpose of this paper is to illustrate that such apparent demerits are largely illusory, and to promote the view that investors in growth freeholds need require no yield premium, and indeed may justifiably accept a discount on yields available from long dated gilts valued around par.