Double digit total returns growth over the next three years predicts Colliers

Oliver Kolodseike, Deputy UK Chief Economist at Colliers International

2024 is set to be the turning point for commercial property with interest rates cut, falling inflation and improved debt financing opportunities boosting investor confidence. Total returns growth will reach 10.2 per cent this year, with capital values forecast to be up by 5.5 per cent on 2023 levels according to Colliers’ latest Real Estate Investment Forecasts.

Whilst general economic conditions will improve, it will still take time for investment activity to resume to levels seen before the market downturn, and Colliers predicts 2024 annual volumes to reach £50 billion.

Oliver Kolodseike, director in the Research & Economics team, comments: “We have seen the outward shift in yields slow significantly, leaving us to believe there’s scope for re-compression in the latter part of this year. Our forecasts show All-Property yields ending the year 24 bps lower than they were at the end of 2023.

“The combination of sustained rental growth and mild yield compression means that following two years of declines, total returns will rise this year. Industrial and retail warehouses will be the best performing asset types between 2024 and 2028.”

The report notes that retail pricing remains attractive when compared to other sectors, which will lead to an uptick in investment activity. Opportunistic investors in particular will continue to be drawn to parts of the retail market by high yields, a stable income return, value add opportunities, and the scope for capital growth.

Although retail equivalent yields are still moving out, stabilisation is expected towards the middle of the year, followed by compression across parts of the sector. Colliers’ forecasts suggest that All Retail yields end 2024 at 6.66 per cent, from 6.91 per cent at the end of 2023. Total returns for the sector are forecast to grow by 10.6 per cent in 2024, with retail warehouses (9.3% per annum) being the sector’s star performer over the five-year forecast horizon.

Yields are also expected to stabilise in the second half of the year for office assets with recompression also possible as the market begins to return when interest rates and debt costs start to fall. Colliers forecasts All Office yields to end this year at 7.35 per cent, down from 7.56 per cent in 2023. Total returns across the office sector will increase by 8.6 per cent in 2024, a nine year high, and average 7.8 per cent over the 2024-2028 forecast period.

Chris Lewis, head of UK Office Investment at Colliers, adds: “Across the UK we have seen the office investment market hindered by a low volumes from both domestic and overseas capital, however the appeal of Grade A, prime located offices still continues to attract investors as the occupational competition for this space becomes ever more heated. For those looking for opportunities this year, there is significant scope for intelligent repurposing opportunities for tired office stock which is no longer seen as fit for purpose.”

The industrial sector in 2023 experienced a dip in both occupational demand and investment as occupiers persist in optimising their logistics networks and investors remain cautious about headwinds, with these trends continuing in 2024. Colliers predicts that market activity will pick up in 2025 as economic recovery, rising household spend and normalised credit conditions create improved levels of business investments.

Over the five-year forecast horizon rental growth rates will slow further from exceptionally strong rates recorded during 2021 and 2022 to more sustainable levels of between 3.5-4.5 per cent per annum. All Industrial total returns rose by 4.1 per cent in 2023 and Colliers predict an acceleration to 11 per cent in 2024 and 14 per cent in 2025.