FTSE 350 property: After property's relief rally

An unexpected catalyst did emerge in the second half - improvements in the sector's debt profile. It's easy to forget that property companies consist not just of assets in bricks-and-mortar but also of matching liabilities. Any weakness on the asset side of the balance sheet last year was more than offset by impressive displays of strength in attracting finance at bargain rates and - crucially - from non-bank sources.

To recount just the most memorable deals: Great Portland (GPOR) raised $200m (£124m) of unsecured debt in the US private placement market at an interest rate of 4.59 per cent; Unite Group (UTG) obtained a £121m 10-year loan from insurer Legal & General (LGEN) at 5.05 per cent; Hammerson (HMSO) issued €500m (£405m) worth of bonds at a coupon of 2.75 per cent; and British Land (BLND) launched £400m of unsecured convertible bonds with a coupon of 1.5 per cent and a conversion premium of over 31 per cent. Among the mid-caps, Unite, St Modwen (SMP) and Workspace (WKP) launched retail bonds. All were helped by further declines in government-bond yields.

Land Securities (LAND) and Hammerson, two of the sector's strongest performers, both reduced gearing by selling off assets. British Land, meanwhile, increased its debt load over the period - a call to which some analysts attribute its underperformance.

The question for investors now is whether the re-rating can continue. Unfortunately - as we argued back in September - it’s hard to see how that performance can continue following the scale of last year's gains. It was driven - not by underlying portfolio growth - but by a collective realisation among investors that the core UK real-estate investment trusts (Reits) were more resilient than originally thought, not least because they have top-notch assets that still command a premium in an increasingly global property market.

Accordingly, the sector now looks fully priced, both by income measures and relative to book value. The large-cap names trade on single-digit discounts to book value, but their earnings and dividend yields are low relative to more profitable global Reits such as Simon Property (SPG) and Unibail-Rodamco (UL). British Land and Land Securities both have substantial development pipelines that should, in time, boost book value. But most of the gains are still a few years off, and the companies’ regional retail portfolios may continue to weigh on returns.

Meanwhile, shares in London's west-end specialists trade at a 10-15 per cent premium to their book values and yield less than 2 per cent. On a three-year view, the ongoing rental growth in London's west end market - one of Europe's healthiest micro-economies - should drive further returns, particularly for Derwent (DLN) and Great Portland, which also own substantial development pipelines. These superb companies are worth holding in any portfolio, but it’s all too easy to imagine a year of share price consolidation before the development super-profits start flowing.