Total returns in the UK’s commercial property sector could top 17% this year, according to Colliers International.
The advisory firm is confident returns can record their highest rate since 2006.
The 17.3% predicted by Colliers in its ‘REIF in Brief’ research also beats the 13.7% in consensus forecasts compiled by the Investment Property Forum (IPF).
Improving occupational markets and falling yields have, Colliers said, led to the bullish total return forecast.
Capital growth of 11.1% and income returns of 5.7% are forecast for this year.
Yield compression is behind Colliers’ total return upgrade this quarter, with 60bps compression expected by the end of the year.
Inflows from retail investors and new sources of overseas capital from Chinese and Taiwanese insurance companies are driving down yields, the agent said. Secondary assets are being targeted. With yields still high, there is, Colliers said, “scope for significant falls”.
Gavin Noblett, Colliers senior property economist, said that, historically, property yields have not moved in “smooth and steady” 10bps increments.
“More often, the property cycle moves forward suddenly and very quickly, as it is presently,” he said. “We have already seen yields fall nearly 20bps in the first quarter and conditions look right for up to 60bps of compression by the end of the year.”
Some sub-sectors, he added, could see up to 100bps of movement.
“We see scope for significant compression, particularly in regional locations and secondary assets where occupiers markets are improving and yields remain relatively high,” he added.
Colliers forecasts that regional offices and UK industrial property will see more yield compression than all other sectors and regions. UK industrial is forecast to be the best performing sector, with total returns in excess of 20% this year.
Prospects for rental growth in 2014 have also improved, with Colliers predicting 2.7% as a consequence of increased tenant demand and falling supply.
Central London will continue to outperform the rest of the UK this year but slow, with five-year total returns to average 9.5%.