Despite the UK heading into a recession, the pricing correction in the commercial real estate sector will be short and sharp, with greater stability expected towards the middle of 2023, according to Colliers’ latest Real Estate Investment Forecasts (REIF).
The real estate firm has downgraded its 2022 total returns forecast from previously +5.9 per cent to -5.0 per cent in the face of downgraded GDP predictions, higher gilt rates, base rate uplifts and accelerated outward yield movements. In previously low yielding sectors, such as industrial, it predicts yield shifts of up to +150 bps.
Oliver Kolodseike, director in the Colliers Research team, comments: “We are in the middle of a pricing correction with yields rising rapidly across most asset classes. Given a significantly gloomier economic outlook than a few months ago when we published our Q3 REIF, we downgraded our commercial real estate forecasts accordingly. Although we now predict the largest contractions of total returns since the double-digit decline in 2008, the contraction is far more modest and we believe that the sector will return to a positive trajectory more rapidly by the middle of next year when inflation begins to fall, the Bank Rate stabilises and gilts fall back on the back of increased investor confidence.”
Despite uncertain economic headwinds that will continue to destabilise capital markets through Q1 2023, occupational markets will show greater stability. This is especially true for the industrial sector, but also prime and upper secondary office stock. The performance of offices will nevertheless show an increasing gulf between Grade A ESG compliant space and the rest notes Colliers.
Colliers notes that the investment forecasts are not uniform across the board. Beds and sheds are highlighted as the most resilient due to sustained levels of occupational demand arising from links to demographic drivers and continued structural change in the industrial sector.
Retail will fare less well, although retail warehouses are predicted to be the best performing asset class in 2023 with rental growth of 1.5 per cent per annum. For retail overall, the firm predicts total returns growth will slow from 10.4 per cent in 2021 to 0.6 per cent in 2022 before picking up to 5.2 per cent in 2023.
In offices, total returns will fall -7.3 per cent year on year, driven by double-digit declines in capital values. This is a marked downward revision from the 2.4 per cent growth predicted in the Q3 REIF. Total returns will then see marginal growth of 1.2 per cent next year before accelerating to 7.2 per cent in 2024 as yields stabilise and then re-compress.
John Knowles, head of National Capital Markets at Colliers, adds: “This isn’t the first downturn of the commercial property market, and it certainly won’t be the last. For those investors who are savvy and willing to take on more risk there is plenty of opportunity out there. Sectors which are traditionally more inflation-proof such as the operational markets or industrial and logistics will weather the storm and remain good long-term prospects, although development will be challenged by yield softening, pressure on income and continued build cost inflation.”