Industrial property, so long the black sheep of the investment market, is now institutional investors’ favoured sector and will become the best performer, according to Baring, Houston & Saunders.

The firm’s annual investment survey shows that industrial is the preferred sector for almost half the institutions surveyed. Retail warehousing is number one for 25% of institutions, high street retail for 19% and offices for just 8%.

BH&S predicts that industrial property will show an average annual return of 11.4% over the next three years, compared with an all-property average of 9.6%. Retail warehousing will show an average return of 10.5%, offices 9.1% and high street retail 7.7%. Although industrial rents are not expected to show much growth, the sector’s comparatively high yields are forecast to come down, and therefore increase values.

BH&S gives two reasons for the strength of the industrial sector. Despite a weak manufacturing market, tenant demand for industrial space comes from businesses that would be classified within the service sector, such as distribution and freight. Secondly, industrial has seen the least amount of new development in comparison with the other sectors.

Investors are fairly sanguine about property prospects this year, but the number of optimists has halved. This uncertain mood is reflected in the market, where a large number of funds are neither buyers nor sellers, says BH&S.

Investors also indicated that their weightings in leisure and residential would continue to rise.