According to Lambert Smith Hampton’s (LSH) latest research report, the Economic and Property Market Bulletin, the UK economy remains on track to grow by 2.8% this year with business investment now the biggest driver of growth.

Despite inflation hitting 3.1% in March, the general consensus is that interest rates will peak at 5.75% or maybe 6% before falling back early next year. Meanwhile, within the commercial property sector, the office market continues to see recovery in letting activity, while increased competitive pressures are creating polarisation between value and aspirational retailing. The office sector is forecast to see total returns of 14.3% in 2007, ahead of industrial at 8.8% and retail at 6.4%.

The All Property total return in the 12 months to end of April was 14.8%. So far this year, property has delivered a total return of 3%, according to the Investment Property Databank. With yields expected to move out further over the coming months, LSH expects total returns to be lower than in the past two to three years. However, rental growth is likely to offset this outward shift in yields partially.

LSH is also predicting total returns of 9.7% this year in the commercial sector. Strong rental growth in the office sector will help the sector to outperform with total returns of 14.3%. Industrial is expected to come second with a total return of 8.8% this year, pushing retail into third place with 6.4%.