Gerald Eve: all-property returns to turn positive in 2021

All-property total returns will fall to -4.5% this year – the first negative return since 2008 – but turn positive again in 2021 with gains of 6%, according to the latest Investment Brief report from Gerald Eve.

Falling rents and rising yields – particularly in Retail – drove the fall this year. But with news of a vaccine likely to encourage greater investment market stabilisation in 2021, total returns will be at their strongest since 2017.

Total returns this year have been supported by the ongoing strength of the industrial sector, in both the occupier and investment markets. Voids continue to be low and further rental growth is anticipated, especially in the South East, while the investor buyer pool for multi-let widened and portfolio deals made a significant return. Industrial rents are at all-time highs and capital values are back to their peak or beyond, but pandemic-led weakness in the first half of 2020 will have limited annual total returns for the sector to a projected +4.2%.

Positive rental growth and further yield compression momentum early in 2021 is forecast to push annual returns for industrial to +7.9% in 2021, with secondary industrial playing an increasingly important role. In parallel, growing investor demand for “living” assets – particularly build-to-rent – is expected to continue across the year.

John Rodgers, head of capital markets at Gerald Eve, said: “Industrial property has been the saving grace of total returns this year, and this strength will be carried into next year too as the fundamentals continue to underpin investment in the sector.

“What we have seen this year is a shift in the tectonic plates of real estate. While the retail sector is undergoing a structural re-pricing accelerated by COVID-19, there are others – such as consumer-focused logistics and real estate supporting digital innovation – that have actually benefitted from the pandemic. This market dislocation will bring investment opportunities in 2021, and in a world of subdued returns those assets that best capitalise on these overarching trends have the greatest upside potential.

“This includes industrial and logistics, but with keen pricing at the prime end of the spectrum, investors will increasingly look along the yield curve to well-located secondary, where arguably the greatest value is now to be found from an income and asset management perspective. Another sector seeing a material wave of growth is living space, particularly build-to-rent property, and this dynamic will continue as the investor base expands and more stock becomes available.”

2021 total returns forecast: best-performers

  • Distribution warehouses
  • Multi-let industrial
  • Residential
  • Healthcare

2021 total returns forecast: worst-performers

  • Hotels
  • Shopping centres
  • Outer London office
  • Leisure