British industry may have reacted with horror to the recent surprise quarter-point hike in UK interest rates but property investors have not been put off by the Bank of England's decision.

Private investors, in particular, have continued to flood the market with funds, as a series of high-profile deals have hit the headlines. Hammerson, one of the big four quoted UK property companies, has just cashed in on its Holborn Links estate, which it owned with Standard Life, in central London, for £118 million sterling to the private investor-backed Englander Group.

In the last month alone in the City of London, private investors have put £240 million of property under offer as an increase in interest from the Middle East - and Arab investors - follows the recent rise in oil prices.

According to national property journal Estates Gazette, Britannic House, the listed HQ of BP Amoco in Finsbury Circus, EC2, is the most significant subject of such interest. It was put on the market at £140 million, reflecting a net initial yield of 6.5 per cent.

Milan Khatri, senior economist at the Royal Institute of Chartered Surveyors, sees a renewed buoyancy in the economy lifting the commercial property market. "Investor interest in the property market is strengthening in tandem with brighter prospects for activity and rents. Though rising long term, interest rates have had a dampening impact on lending to the real estate industry. Rising activity in the economy is spilling over into better occupier demand for industrial and office commercial property. The outlook for the retail sector looks particularly healthy as household spending improves."

Not only private investors have been biting in the UK market, institutions, including the Prudential, CGU, Equitable Life and Norwich Union, are all known to be actively targeting commercial property investments.

Sanjay Kapila, senior analyst at Knight Frank, says: "The sharp turnaround noted in the UK economy since the second half of 1999 will provide good prospects for future rental growth. Despite the recent and unexpected hike in interest rates, UK institutions are likely to maintain their strong net investment into property for the remainder of this year."

He notes that the recent figures from the Office of National Statistics confirm that total net investment by UK institutions in commercial property during the second quarter of this year is just under £1.1 billion. That is a substantial increase on the £77 million registered in the first half of 1999.

"The latest figures re-inforce UK institutions' strong appetite for commercial property as an asset class following the relatively low level of net investment in the first quarter," says Mr Kapila. "With property currently yielding around 7 per cent, against 15-year gilt yields at 5.3 per cent and equities at 2.4 per cent, the positive yield differential between real estate an competing investments remains very favourable to institutional investors."

Chris Ireland, head of London investment at King Sturge & Co, agrees that institutions are active but stresses that they are targeting "good, prime-located, product". "The UK funds are very active, and only held back by the fact that there is not enough product in the marketplace - they are targeting industrial property in the southeast and good quality retail parks," says Mr Ireland.

Only pure debt-driven buyers have been affected by rate rises, he says, and, even then by the five and seven-year fixed-rate figures, not the recent hike in base rates.

He explains that they have been active over the last three or four months, but are now becoming a less significant presence in the market.

According to Knight Frank, at the half-year stage, total returns from direct property were on track to improve by the year-end. Commenting on figures from the second quarter of the year, Mr Kapila expects total returns from property this year to be around 11-12 per cent. "With an improvement in the UK economy expected during the second half of 1999, the commercial property market is pointed for a turnaround in investment performance prospects."

Another commercial property agency, Richard Ellis St Quintin, confirms in its latest monthly index of the investment market overall annual rental growth is on an upward trend. The all-property annual rental growth has risen for the first time since January, it notes. Annual rental growth crept up to 5 per cent in July, from 4.9 per cent the previous month, and the all-property short-term indicator for rental growth now stands at 5.9 per cent. In the high streets, retail rental growth is performing well, according to the short-term rental growth indicator, which saw a rise from 5.6 per cent in June to 6.5 per cent this month.

According to Peter Damesick, head of UK research at REStQ, "after a very strong monthly performance in June, property returns eased in July, with slower capital growth. The rate of rental growth now looks to be quickening, with the short-term indicator at its highest for 12 months. Interestingly, property seems to be responding remarkably quickly to the changing pace of the economy".

He adds there were marginal improvements in the annual total return of high street retail, industrials and retail warehousing in July. However, these improvements were countered by the slowing of the total return for offices from 12.2 per cent to 11.9 per cent.