In the first 10 months of the year £45 billion was invested into commercial real estate, with full year 2021 figures expected to reach £60 billion notes Colliers in its latest Real Estate Investment Forecasts report.
Oliver Kolodseike, Head of Economic Research at Colliers, comments: “This year we have seen a continued demand for industrial and distribution units which in part explains the recovery we have seen. The strength of the sector, paired with the ongoing strength of prime assets across most market segments, means we will see the all property equivalent yield be over 50bps down on 2020 levels by the end of the year. Looking ahead to 2022 we can also expect some further compression in the office sector as occupational markets pick up and travel restrictions are eased further.”
Overseas capital accounts for more than half of all transactional activity by value so far this year. US investors were particularly active, investing £11.6 billion in the first 10 months of 2021, beating every annual total except for 2015’s (£13.1 billion). Asia-Pac capital has been deterred by quarantine restrictions and therefore only accounts for around 10 per cent of all overseas transactions, down from 20 per cent in 2020 and an average of 30 per cent in the five years prior the pandemic. UK institutions only account for 10 per cent of all activity by value so far this year, compared to 17 per cent in the five years prior the pandemic.
Industrial has been the star asset class of 2021 with full year investment figures on course to break through the £15 billion mark, dwarfing the previous record of £11 billion set in 2017. The industrial sector will see returns of 31.3 per cent this year, the best performance since 1988, driving the total returns growth for commercial property to a seven-year high of 14 per cent this year.
Although investment into the retail sector is still subdued by historical standards, the £4.8 billion transacted during the first 10 months of 2021 was higher than both the corresponding 2019 (£4.3 billion) and 2020 (£3.7 billion) figures. Recovery in the sector is being driven by the performance of retail warehouses and supermarkets, with yields for retail warehouses compressing by almost 80bps so far this year, according to the quarterly MSCI index, with several assets trading at sub-5 per cent yields.
All retail total returns are expected to show growth of 6.5 per cent this year, having suffered a 12.4 per cent decline in 2020. The main drivers are retail warehouses (+13.2 per cent) and supermarkets (+14.6 per cent). Total returns growth will then moderate to 5.3 per cent in 2022 before picking up again over the remainder of the five-year forecast horizon.
Office investment volumes reached £12.2 billion this year to end of October, up on the corresponding 2020 figure (£9.8 billion) and only marginally below 2019 levels (£12.7 billion). Asian investors deployed £7.9 billion in 2017 and £6.9 billion in 2018, but in the year to date this figure stands at only £1.3 billion. Colliers therefore believe that pent-up capital from this region will drive demand over the coming months and into next year.
All office total returns will record growth of 5 per cent this year before accelerating to 7.1 per cent in 2022 as yields continue to compress and rental growth picks up. Over the five-year forecast horizon, Colliers expects total returns to average 4.8 per cent per annum.
Around £4 billion was invested in the residential sector in the first 10 months of 2021. Although this is down from £4.7 billion over the same period in 2020 and £4.5 billion in 2019, the figure is around 10 per cent above the five-year quarter average. If trend growth continues, the annual investment in the sector should top £5 billion for the fourth year running. Latest quarterly MSCI data shows that equivalent yields in the residential sector hardened by 12bps in Q3.
The medical market has more than doubled its 2020 investment volumes attracting £1.6 billion between January and October, compared to the corresponding 2020 figure of £700 million which is 80 per cent above the five-year average. Korian Real Estate UK (£116 million across four deals), Alpha Real Capital (£70 million across two deals), and Aberdeen Standard Investment (£63 million across two deals) were the most active players so far this year.