2024 is set to be the turning point for UK commercial property with interest rates cut, falling inflation and improved debt financing opportunities boosting investor confidence, according to new research from Colliers.
Total returns growth will reach 10.2% this year, with capital values forecast to be up by 5.5% on 2023 levels according to Colliers’ latest Real Estate Investment Forecasts.
While general economic conditions will improve, it will still take time for investment activity to resume to levels seen before the market downturn, and Colliers predicts 2024 annual volumes to reach £50 bn.
Oliver Kolodseike, director in the Research & Economics team, commented: 'We have seen the outward shift in yields slow significantly, leaving us to believe there’s scope for re-compression in the latter part of this year. Our forecasts show All-Property yields ending the year 24 bps lower than they were at the end of 2023. The combination of sustained rental growth and mild yield compression means that following two years of declines, total returns will rise this year. Industrial and retail warehouses will be the best performing asset types between 2024 and 2028.'
The report notes that retail pricing remains attractive when compared to other sectors, which will lead to an uptick in investment activity. Opportunistic investors in particular will continue to be drawn to parts of the retail market by high yields, a stable income return, value add opportunities, and the scope for capital growth.
Although retail equivalent yields are still moving out, stabilisation is expected towards the middle of the year, followed by compression across parts of the sector. Colliers’ forecasts suggest that All Retail yields end 2024 at 6.66%, from 6.91% at the end of 2023. Total returns for the sector are forecast to grow by 10.6% in 2024, with retail warehouses (9.3% per annum) being the sector’s star performer over the five-year forecast horizon.
Yields are also expected to stabilise in the second half of the year for office assets with recompression also possible as the market begins to return when interest rates and debt costs start to fall. Colliers forecasts All Office yields to end this year at 7.35%, down from 7.56% in 2023. Total returns across the office sector will increase by 8.6% in 2024, a nine year high, and average 7.8% over the 2024-2028 forecast period.
The industrial sector in 2023 experienced a dip in both occupational demand and investment as occupiers persist in optimising their logistics networks and investors remain cautious about headwinds, with these trends continuing in 2024. Colliers predicts that market activity will pick up in 2025 as economic recovery, rising household spend and normalised credit conditions create improved levels of business investments.
Over the five-year forecast horizon rental growth rates will slow further from exceptionally strong rates recorded during 2021 and 2022 to more sustainable levels of between 3.5-4.5% per annum. All Industrial total returns rose by 4.1% in 2023 and Colliers predict an acceleration to 11% in 2024 and 14% in 2025.
