Colliers predicts total returns growth of 6.4% for commercial property in 2021

Oliver Kolodseike, Deputy UK Chief Economist at Colliers International

Colliers expects total returns growth for the commercial property market of 6.4 per cent in 2021, comprised of 4.8 per cent income return and 1.6 per cent capital growth. This follows a modest 2.3 per cent decline in all property total returns in 2020. The firm notes that industrial and supermarket assets will be the most popular with investors in its latest Real Estate Investment Forecasts report.

Oliver Kolodseike, deputy chief economist at Colliers, comments: “Latest business and consumer confidence survey data suggest that the economy will bounce back strongly in Q2. This is heightened by consumer confidence rising to its highest level since before the start of the pandemic, adding to hopes that the consumer sector will help drive the economic recovery.

“Mild rental growth will result in a slight reduction in yields in the short term, but we

expect yields to then generally shift out in line with the trends for the Bank of England Bank Rate and 10-year government bond yields. At the all property level, equivalent yields will compress by around 20 bps this year.”

Colliers predicts that over the five-year forecast, industrial and supermarkets are predicted to be the best performing sectors, driven by yield compression this year and sustained rental growth over the horizon.


The firm notes that retail is a particularly hard sector to forecast for as in many instances, market comparable rents are being replaced by turnover based rents or distorted by a growing set of landlord incentives, many linked to lease extensions. Oliver continues: “This discrepancy makes forecasting the MSCI data more difficult than ever. Our forecasts are designed to predict the future MSCI index as an indicator of trends and turning points, rather than as a means of producing fixed rental levels.”

Colliers’ latest forecasts of the MSCI index suggest that rents will continue to fall across all

retail segments in 2021, except for supermarkets. Shopping Centres (-11 per cent y/y) and

Standard Shops – Rest of UK (-12 per cent y/y) will see the largest declines. Retail parks (-5 per cent y/y) will hold up somewhat better than shopping centres. Supermarket rents will stabilise in 2021 and return to growth thereafter. Across all retail rents will continue to decline in 2022 and average -1.1 per cent per annum over the 2021-2025 forecast.

Retail warehouses and supermarkets are driving the sector’s performance in 2021, with all other sub sectors recording negative total returns growth. All retail total returns are expected to show marginal growth of 0.6 per cent this year, having suffered a 12.4 per cent decline in 2020


The office sector has also been going through a structural change with lease lengths shortening according to Colliers. While the proportion of deals signed with lease commitments in excess of three years averaged out at 77 per cent between 2016-2019, in 2020 the equivalent number was down to just 53 per cent.

The combination of the successful vaccination roll-out and a phased return to the office will further boost investor confidence. Colliers predicts total returns to increase by 2.8 per cent in the South East and 3.0 per cent in the Rest of UK this year, which compares to 2.5 per cent for Central London. All-office total returns are expected to increase by 2.4 per cent this year comprised of 4.1 per cent income return and capital growth of -1.6 per cent (0.1 per cent residual). All office total returns will average 5.1 per cent pa over the forecast horizon.


Unrelenting strong demand for industrial assets paired with a limited development pipeline

and structural changes in the retail sector will continue to drive up both prices and rents. Colliers expects all industrial yields to continue to harden in the remainder of the year and forecast all industrial yields to stand at 4.73 per cent, 43bps lower than at the end of 2020. Looking ahead, the firm predicts a stabilisation in 2022 and very mild outward shifts thereafter.

Rental growth is expected to remain relatively strong in 2021. Colliers is forecasting annual ‘all industrial’ rental growth of 3.3 per cent this year, with London and the Rest of South East expected to outperform at 4 per cent and 3.5 per cent, respectively. This is an improvement on the 2.6 per cent the firm predicted in February, reflecting stronger than anticipated Q1 MSCI data.

Given the ongoing strength of rental growth and firming of yields, all industrial total returns will show growth of 16.1 per cent this year, before slowing to a more sustainable rate of 5.4 per cent in 2022.

John Knowles, head of National Capital Markets at Colliers, added: “It is particularly hard to forecast across all sectors over the next six months, however it does seem that industrial will continue to benefit from a demand driven market, much as it has done over the last 18 months. I have high hopes for the office sector, as confidence returns as people start to occupy their workplace again and business travel should open up to some extent over the next couple of months.

“Regardless of what the figures show, there is certainly a sense of pent up demand and it is set to be a busy second half of the year as investors start to deploy capital and reassess risk decisions.”