Total UK property returns could reach at least 10% this year, according to Cluttons Investment Management, buoyed by a recovery since October 2020 of 4.2% and increasing confidence following a return to 'normality'.
Despite values remaining down on pre-pandemic levels - 2.7% as at the end of quarter two, Cluttons Investment Management said that the recovery signs were strong across a number of sectors and that confidence together with values meant that there were strong opportunities for investors to create value, particularly in the retail sector where values have stabilised at some 30% below pre-pandemic levels.
Jamie McCombe, head of Cluttons Investment Management, said: 'The signs of recovery for real estate are strong and we anticipate that total returns will reach higher levels than initially expected by the industry. Industrials are of course leading the way with between 12-20% rises in values and even retail seems to be stabilising following significant falls in value at the start of the pandemic.
'With interest rates likely to remain at 0.5% in the short term despite inflationary pressures, and the performance of offices strengthening post the ‘great return to work’, we expect returns of 10% plus this year which, given the challenges the industry has faced since Feb 2020, is a strong performance and one that should buoy all stakeholders in the sector.'
Sector highlights
Cluttons Investment Management’s quarterly examiner highlighted that industrials continued to forge ahead with London industrial values rising 20%, followed by the South East at 14% and the rest of the UK at 12% average rises.
Shopping centres and high street retail values stabilised while supermarket values rose 5% since October 2020.
Confidence in the office sector saw a marked increase as investors look to reposition assets to take advantage of changes to working patterns in line with increased instances of hybrid and flexible working.
There are also many examples of asset managers looking to put in place flexible office brands with lower densities and higher design elements at more premium rents to take advantage of this structural change in the market.
McCombe continued: 'Unsurprisingly, our research also highlighted ESG as the lead property concern for investors who are increasing their weighting to social impact investments; while on a macro level interest rates and the relaxation of quantitative easing by the MPC were top of investors’ watchlists.
The expectation of low interest rates into the long term is driving the pricing of stocks, bonds, housing, commercial RE and even cryptocurrency.
'Today investors are basing pricing on the expectation that interest rates will stay below 0.5% until 2027 and below 1% until 2033 – a far cry from previous investor generations who worked on the long-term average interest rate of 5% which perhaps tells us that the traditional cycles we all learned to work with have forever changed.'
