UK real estate is due for double digit returns, according to Capital Economics.
The firm’s UK Commercial Property Analyst report foresees returns to be on a par with the 14% recorded last year. The report said returns could average more than 9% over the coming five years, with the industrial and leisure sectors likely to outperform.
Capital Economics said the UK’s economic recovery ”appears to be back on track”, with forecasts for GDP to rise by 3% this year and by 2.5% in 2016.
”Renewed uncertainty in financial markets, stemming from the Greek election result, the slump in oil prices and the resulting downwards pressure on inflation, have all acted to lower expectations for interest rates and pushed risk-free rates to record lows,” the report said.
While a rise in official interest rates in the second half of the year is not ruled out, the firm said the ”bigger picture is that interest rates are set to stay low for the foreseeable future”.
”We think it is plausible that the peak for official interest rates in the coming tightening cycle could be as low as 3%,” the report said.
With bond yields unlikely to move above 3.5% over the next five years, the firm said ”a case can be made that property has not yet adjusted fully to the new low rate environment”.
Capital Economics expects property yields to drop by 40 to 50 basis points from current levels, with most yield movement predicted to occur in the next 12 months.
Industrial property, where yields are already at record lows relative to offices, may experience less yield compression.
Office rental values will be supported by low vacancy rates and a limited development pipeline, the report said.
”Taking the market as a whole, we think that office rents might rise by 8% this year and a further 5% in 2016,” Capital Economics said, adding that ”steady gains in industrial and leisure rental values” are likely.
Capital Economics said it is ”less optimistic” for the UK’s retail and hotel sectors, with economic weakness and the drop in currency impacting visitor numbers from the euro-zone. The internet continues to alter the retail landscape, the report said.