Colliers expects all-property total returns growth to moderate to 9.6 per cent in 2022 and 6.4 per cent in 2023 as rental growth slows and yields stabilise, following a six year high of 16.5 per cent in 2021. The industrial sector will continue to remain popular with investors this year, as will retail warehouses, prime offices and life science/pharma assets, predicts the firm. All market segments are expected to record positive total returns growth in 2022, led by industrial at 13.2 per cent.
Oliver Kolodseike, head of Economic Research at Colliers, comments: “Last year we saw the market demonstrate its resilience across the UK. Investment volumes were above their respective five-year averages in five of the Big-Six cities, and we saw overseas capital continue to be active accounting for 46 per cent of all investment, helped by a record-year for US investors who deployed £15.3 billion. This has meant that many of our forecasts are optimistic with positive returns and yield compression in many sectors.
“Comparatively, gilts are expected to reach 1.72 per cent by the end of 2022 (Oxford Economics, February 2022), while we predict all-property yields to harden by a further 17 bps, with particularly large inward movements across several retail market segments. Industrial and prime offices will also see further yield compression this year.”
Retail investment sales reached a four-year high of £7.2 billion in 2021, helped by a strong Q4 during which £2.6 billion was transacted. This year, although tourism volumes should slowly return to “more normal” levels, and thereby support high street shopping, falling real household incomes and declining consumer confidence will continue to put pressure on retailers. Colliers predicts further rental falls across most retail segments over the next two years, but an eventual return to growth in 2024.
Despite significant rental declines, we believe that the pricing correction of the past few years has come to an end. Colliers’ forecasts suggest that the all retail yield will move in by 19bps this year. Yield compression is driving total returns growth of 8.7 per cent for all retail this year. Retail warehouses (+12.8 per cent) and standard retail rest of South East (+10.7 per cent) will perform particularly well, helped by a growing number of investors reconsidering high street opportunities.
Office investment volumes reached £17.7 billion in 2021, up on 2020’s £13.2 billion and in line with the 2019 figure. Occupationally, a common theme throughout 2021 was activity within the life sciences and pharmaceutical sectors. Together, Oxford and Cambridge recorded total take-up of over 600,000 sq ft, more than Reading, Slough, Bracknell, Maidenhead and Uxbridge combined.
In Cambridge alone, 2021 life science and pharma take-up was 639,000 sq ft, an increase of 112 per cent on the 337,000 sq ft recorded in 2020. In Cambridge, rents rose by 15.4 per cent to a new record-high of £45 per sq ft during 2021. Similarly, Oxford’s out of town market recorded rental growth of an even stronger 16.7 per cent.
Colliers predicts all office total returns will record growth of 6 per cent this year, up from 5.3 per cent in 2021 as yields continue to compress and rental growth is sustained. In 2022, rest of South East (+7.1 per cent) and City (+6.6 per cent) will reach the highest total returns over a five-year forecast horizon with total returns averaging 4.8 per cent per annum.
Annual industrial investment volumes reached a record-high of £18.1 billion in 2021, dwarfing the previous record achieved in 2017 when £11 billion was transacted. Given the continuous demand for space, supply is likely to remain constrained for at least the next 12-15 months. Colliers forecast all industrial yields will fall to 4.04 per cent by the end of 2022, a further 18bps lower than at the end of 2021, there will be stabilisation in 2022 and very mild outward shifts thereafter.
We forecast annual all industrial rental growth of 6.6 per cent this year, with London and the rest of South East’s expected to outperform at 8.5 per cent and 6.5 per cent, respectively. Given the ongoing strength of rental growth and firming of yields, all industrial total returns will show growth of 13.2 per cent this year. While this is down from the 36.4 per cent recorded in 2021, the sector remains the top performer.