There are a variety of factors weighing heavily on the UKs real estate market. The commercial sector is under pressure as a result of the countrys economic woes, though it has remained more stable than might be expected. Activity in commercial property has been very slow as businesses and landlords watch and wait for signs of economic recovery. The most active players are overseas investors and UK institutions, with private property companies selling off the majority of space, according to real estate services firm CB Richard Ellis (CBRE).

The office space sub-sector is a particularly stable element of the sector, with office space in central London experiencing a healthy run of growth. This now looks to be slowing, but we expect growth to remain positive, as the capital has limited scope for new development and demand has moved faster than new supply can meet. Retail and industrial space have been much quieter than the office space sub-sector but still remain stable, with flat results rather than declines.

In March 2011, UK Chancellor George Osborne announced a range of proposals to improve real estate investment trusts (REITs) in the UK, including simplifying structures, improving tax issues and reducing set-up costs. In our view, these changes are likely to spur the development of the UK sector, enabling institutions to more easily set up a REIT, which provides investment opportunities in underlying property assets and is taxed in the same manner as if investors owned the underlying assets. Most UK property companies have converted their status into a UK-REIT, and there are a number of new players entering the REIT market. The sector has proven resilient in light of the global financial crisis and a subsequent dramatic reduction in property demand and valuation.

Some of the key opportunities currently in the real estate market are:

- In 2012, local sources in both London and Manchester expect to see increasing rents across all three sub-sectors: office, retail and industrial.

- Real estate services firm Jones Lang LaSalle reports that in Q211, London came second only to New York in terms of commercial real estate investment, attracting GBP3.6bn in the quarter. It included more than 40% for office space.

- Real estate advisor DTZ reports that there is a lack of high-end commercial property, particularly in London, and that this that has been keeping the sector stable in a quiet period. Local sources in London put office space vacancy at around 19%. Jones Lang LaSalle puts the vacancy rate of grade-A space at as little as 4.3% across the country in Q211.

There are risks to the health of the UK real estate market:

- In London, the troubled banks and related financial services businesses have caused some relocation activity and, despite some stabilisation, there has been a general trend in moving outwards to restart.

- Economic weakness remains a real threat. For commercial property, the risk is greatest if any downturn exists for a prolonged period.