It is often said that when the United States sneezes, the rest of the world catches a cold. But while a global slowdown is anticipated, real estate in the UK will keep its value better than other investments and perform significantly better than it did in the last recession a decade ago, according to the latest data from LaSalle Investment Management.

"Most of our optimism stems from the fact that the European real estate community has learned some hard lessons since the early 1990s, limiting speculation and controlling overbuilding in the ensuing years," said Robin Goodchild, European director of Research and Strategy at LaSalle.

However, Tim Smalley, of Abbey National Treasury Services, warns of the risks involved if the US market crashes. He said: "Property as an asset class is still strong in the UK.

"If there is a hard landing from the US, it has the potential to have a big impact on the UK market - we're not immune to what happens in the US. But the UK economy looks okay at the moment."

Smalley agrees that signs remain positive for UK property market in the medium term. "There's no suggestion of a crash because we've got lower interest rates now and banks are less willing to fund speculative development, plus there's still a supply and demand imbalance, so rents and capital values should still edge up."

Further evidence of property's buoyancy was found in the recent study by Investment Property Databank (IPD) which named property as the best-performing asset class in the UK in the past three years.

Returns averaged 12.2 per cent, against 9.8 per cent from equities and 9.6 per cent from gilts. Meanwhile, investment properties made 10.4 per cent, down from 14.5 per cent in 1999. Offices returned 15.5 per cent, up from 14.1 per cent, and retail property slumped from 14.1 per cent to 6.6 per cent.

Property lending has now reached record levels, according to recent Bank of England statistics. The Bank of England's figures reveal that total property lending for the year to March 2001 increased by £13.6 billion sterling over the same period last year.

The increase was the largest annual rise on record, beating the previous highest increase of £10.7 billion, recorded in 1989.

This increase means the total amount of loans outstanding to property companies in Britain is now £60.8 billion - compared with the early 1990s peak of £40.7 billion for the second quarter of 1991 - and shows an increase of £3.6 billion from the previous quarter.

This is due to a surge in lending since mid-2000, driven by record levels of investment activity in many property sectors coupled with favourable finance rates for the investors who have underwritten this growth.

According to Tim Smalley, loan-to-value ratios for prime London-based landmark schemes are hitting 90 per cent on very secure cash flow schemes.

However, he believes this rate will drop to 65-70 per cent in a less prime market.

He explained: "If you wanted to do a £20m deal, the average loan-to-value rate, depending on each individual case's merits, would be between 70 and 80 per cent with 20 to 25 per cent equity.

"Banks are being selective and more sensible lending is taking place. But it's not difficult for proven borrowers with good cash flows to get money."

In general, it appears that UK banks are now more cash-flow driven because of burnt fingers they suffered in the last market downturn. Back then they tended to focus more on loan-to-value ratios and capital value than cash flow.

Smalley said: "Now cash is king. You need to have equity in deals. There can be a high level of gearing on a nice building - 10 per cent up to 35 per cent of the purchase price in some cases."

Overall, loan-to-value ratios have increased slightly in the UK, with average loan-to-value ratios just below 70 per cent.

Industry pundits predict continued growth in lending activity for the remainder of this year. Feedback from UK banks shows they remain positive about the UK property sector and are keen to continue to expand their property loan books, given appropriate opportunities.

"Most banks are expanding their loan books at the moment. For the right product, there's readily available money. However, they are more selective than a couple of years ago. For the right deal, there's money," Smalley explained.

The UK's interest rate environment also remains favourable for leveraged investors who continue to be able to capitalise on positive yield gaps between property yields and finance rates, at a time when institutional investors are holding back.

Further cuts in interest rates would inevitably boost the stagnant investment market. A lot of institutions now appear to be sitting on the fence, waiting to see how much the UK market is going to slow down. However, lower rates would certainly be a boon.

"On a very attractive deal you're looking at 75 basis points over the base rate. Interest rates have edged up over the last six months and banks are generally not lending over 1 per cent as an average," Smalley said.

Commenting on Irish investors' trends in the UK market, he said: "A lot of Irish investors are buying landmark London offices - high quality assets with a secure income stream which is very highly leveraged."

London's West End and City markets remain key to the investment market, with banks still focusing on these areas.