The market underestimated commercial property’s performance last year – will it do so again in 2018?
- A rebound in deal volumes, double-digit returns, and a recovery in rental prospects: 2017 was unexpectedly strong on multiple fronts. In the wake of significant political uncertainty, commentators could be forgiven for underestimating the vigour of the market last year. Yet as 2018 unfolds, the consensus outlook is once again more defensive than we believe is warranted.
- In our latest capital markets research, we set out some of our predictions for the year ahead. We agree in most sectors, significant further yield compression is unlikely, although there may be exceptions for the best prime and long-let stock. But, we also see healthy rental prospects for key parts of the market, a significant weight of UK-focused capital, and a generally more supportive global macro environment. This mix could push returns to 7.0% this year – below the 11.2% seen last year, but above the November IPF consensus of 4.0%.
- That said, we remain alive to multiple risks. Ongoing prospects for a step-change in political uncertainty, an excessive inflationary impact or policy error on base rates, or higher equity market volatility remain firmly on the radar. While not our central scenario, we recognise these, and similar concerns, as drivers of greater focus on prime assets with income security.
- At £55bn, deal volumes will remain robust in 2018. 2017’s unexpectedly high level of investment may prove hard to beat, but from overseas investors to domestic funds, listed equity, and councils, there will be no shortage of capital targeting direct property. M&A, private equity, platform acquisitions and the rise of debt funding will unlock additional opportunities.
- Ultimately, there are valid reasons to expect 2018 to be a year of gently easing performance, and that is reflected in our lower asset class return forecasts. While it is still too early to point to a market-wide plateau in values, performance will undoubtedly become far more nuanced by sector, geographic and quality.