Property total returns in 2021 should see growth of 3.8 per cent, comprised of 4.6 per cent income return and -0.8 per cent capital growth according to Colliers’ latest Real Estate Investment Forecasts research.
This will rise to total returns growth of 6.3 per cent in 2022 and then 5.5 per cent in 2023 as recovery continues, notes the firm. It is predicted that over the next five years industrial and supermarkets will be the best performing sectors.
All property equivalent yields will be relatively stable this year as further outward movement across the retail and leisure sectors contrasts with mild compression across the industrial and office market segments. Colliers expect yields to then shift out in line with the trends for the Bank of England Bank Rate and 10-year government bond yields.
Oliver Kolodseike, Deputy UK Chief Economist at Colliers, comments: “There are a range of forecasts out there for the UK economy, some more pessimistic than others, but at Colliers we fall on the slightly more optimistic side. The second quarter of the year should bring with it renewed GDP growth.
“We estimate there is a glut of personal savings totalling £100 billion as people save on commutes, dining out, holidays and so on. How far this is unleashed in the second half of the year will dictate our recovery, but we imagine it will be a significant amount.”
Industrial Outlook
Polling results from Colliers’ latest Industrial & Logistics Market Update webinar highlighted that 81 per cent of industry professionals expect the market to remain buoyant throughout 2021 and beyond. Furthermore, 58 per cent of respondents stated that yields will remain unchanged, while 34 per cent expected further yield compression in 2021.
This is largely in line with Colliers’ in-house forecast. We expect yields to harden slightly in 2021 before stabilising in 2022. It is expected there will be a very mild outward shift thereafter. Rental growth is expected to remain relatively strong in 2021. Colliers is forecasting annual ‘all industrial’ rental growth of 2.6 per cent this year, with rental growth for London and the ‘Rest of South East’ expected to outperform at 3 per cent and 2.9 per cent, respectively. All industrial total returns will show growth of 7.5 per cent this year and then slow to 6.3 per cent in 2022 and 5.3 per cent in 2023.
Len Rosso, Colliers’ Head of Industrial & Logistics, adds: “Appetite for prime industrial assets, both multi-let and single-let distribution warehouses, remains strong. We are expecting new overseas entrants to chase industrial assets this 2021, while established UK investors will be keen to further increase their portfolio weighting towards industrial, as the sector continues to offer the most security, rental growth and returns.”
Office Outlook
Colliers expects most of the rental declines in the office sector to occur during the first half of this year. That said, best in class property is set to remain in short supply across all centres, allowing prime stock to prove more resistant to downward rental pressure.
The vaccine roll-out, improving economic conditions and a return to the office in the second half should help the office sector to stabilise. Despite scope for mild-yield compression in the capital, from a total returns growth perspective, the South East and ‘Rest of UK’ office markets will perform better than London in 2021. Total returns are expected to increase by 3.5 per cent in the South East and 3.7 per cent in the ’Rest of UK’ this year, which compares to 1.4 per cent for central London. All-office total returns are expected to increase by 2.3 per cent this year, comprised of 3.9 per cent income return and capital growth of -1.6 per cent. All office total returns will average 5.1 per cent per annum over the forecast horizon
Retail Outlook
Colliers forecasts that rents will continue to fall across all retail segments in 2021. The largest declines will be seen in shopping centres and high street shops (excluding London), which will both see a decline of 10 per cent year on year. Retail parks will hold up somewhat better than shopping centres and see a decline of around 5 per cent year on year, driven by changing consumer behaviour, rising online sales and ease of parking and access.
All-retail total returns are expected to show marginal growth of 1.4 per cent this year, having suffered a 12.4 per cent decline in 2020. This will be driven by income growth as capital growth is expected to remain in negative territory over the next couple of years. Retail warehouses and supermarkets are driving the sector’s performance in 2021, with all other sub sectors recording negative total returns growth.