All property returns in the UK are predicted to grow by 5.3% in 2023 and 10.8% in 2024 according to Colliers’ latest Real Estate Investment Forecasts (REIF), an upward revision from the 3.1% and 9.1% the firm predicted in its Q4 2022 report.
‘Yields have risen faster than we had anticipated in Q4 2022, and we believe that the current re-pricing period will come to an end towards the middle of the year, with slight re-compression across several sectors in H2,’ said Oliver Kolodseike, director in the Colliers Research team.
‘This, combined with the fact that total returns fell sharper than we had anticipated in our Q4 2022 REIF, has led to upward revisions to both our 2023 and 2024 forecasts.’
The report highlights that all office returns fell by 9.8% in 2022, marking the steepest drop since 2008 when returns declined by 22.8%. While rental growth of 2.2% was sustained last year, yields rose by almost 100 bps in H2, resulting in a 13.2% decline in capital values.
Colliers believe that yields will continue to rise over the coming quarter, ending 2023 at 6.66%, up from 6.47% at the end of last year. Total returns growth will be weak this year as office rents fall (2.0%) before accelerating to 8.4% in 2024.
Rental growth for industrial is expected to slow from the strong rates recorded throughout most of 2021 and 2022. All Industrial rents are forecast to increase by 3.7% in 2023, before accelerating slightly over the remainder of the forecast horizon to 2027. The firm predicts a further rise in yields in Q1 and potentially Q2 before stabilising and re-compressing towards the end of 2023. Beyond 2023, yields will compress, moving from a predicted 5.70% at the end of 2023 to around 5% by the end of 2027.
Given the sharp pricing adjustments in retail that have already taken place, some segments of the sector have scope for mild compression in H2 2023. All Retail yields will therefore end this year at 6.51% which is 13 bps lower than at the end of 2022. Yields will then continue to move in to 6.28% in 2024.