The UK commercial real estate market could post the best annual returns in 25 years, according to M&G Real Estate.
The fund manager has made the case for a 20% return this year as strong capital inflows and occupier demand combine to produce a short-term spike in performance.
The report predicts annual returns to revert to “the trend level of between 6% and 8%” over the medium term.
M&G, owned by insurance company Prudential, said: “Heightened confidence in the UK’s economy, with growth ahead of its closest competitors, the US and Canada, is triggering increased occupier demand – particularly in the office and industrial markets. This demand is resulting in lower vacancy rates and accelerating rental growth.”
It was also noted that secondary offices in the south east of the UK were outperforming prime assets, “proving prime is not always the best”.
It said: “Throughout the rest of the country, secondary stock is catching up with those of prime assets as risk appetite increases.”
Richard Gwilliam, head of research at M&G Real Estate, said: “The UK economy and property market are experiencing rapid growth, leaving behind a period of difficulty that discouraged risk appetite across the board. It’s a different picture now as the weight of capital targeting the sector is showing no signs of let-up. Investors, however, should not be blinded by a high short-term yield without fully assessing the risks to the long-term income stream of an asset.
“The strongest option for investors looking for mid to long-term rental growth is the office market encircling London, particularly those fringe areas benefiting from infrastructure projects.”