Slower yield compression weighs on capital growth
My subscription
My Subscription All Publications

Slower yield compression weighs on capital growth

Euro-zone commercial property values made further gains in Q1. Quarterly rental growth was strongest for industrial, though office and retail rents also rose. However, the pace of yield compression reduced, limiting capital value growth. And we expect this slowdown to continue, given the weaker economic outlook and expected rises in interest rates and bond yields, which mean property yields are likely to reach their trough this year. Property Drop-In (19th May): What will rising interest rates mean for commercial property returns in the US, UK and Europe? Join our 20-minute briefing on the outlook for returns on Thursday. Register now.
Amy Wood Senior Property Economist
Continue reading

More from European Commercial Property

Non-Euro European Commercial Property Outlook

Emerging Europe: Property yields to move higher

Weaker economic activity and higher interest rates as a consequence of the war in Ukraine will weigh on property performance in Central and Eastern Europe (CEE). Shifts in investor sentiment and a sharp deterioration in valuations are expected to put upward pressure on property yields from this year. We now think CEE all-property yields will rise by a cumulative 45bps over the coming years. This will contribute to capital values falls in the coming years, particularly in the office and industrial sectors where the rental outlook is softer. After 2022, this will mean retail steps up as the best performing sector.

30 June 2022

Non-Euro European Commercial Property Outlook

Scandi & Swiss: Rising interest rates to hit values

The rapid turnaround in the interest rate environment has led us to revise down our expectations for property performance in Scandinavia and Switzerland. Property valuations deteriorated sharply in Q1 and are expected to come under more pressure given further rises in bond yields. We now think property yields will reach their troughs this year and will rise by a cumulative 30bps-35bps over the following few years. With structural changes weighing on the office and retail sectors, rental growth is unlikely to be strong enough to prevent a material slowdown in capital value growth, with falls likely in 2023-24. This will contribute to a sharp drop in returns after this year. Within this, industrial is still expected to perform best, but the margin of outperformance will reduce significantly compared to recent years.

27 June 2022

Euro-zone Commercial Property Outlook

Rising interest rates to speed up property correction

The weaker economic outlook and larger increases in interest rates are expected to weigh on property performance. With valuations under increasing pressure from sharply rising bond yields, we think that property yields will reach their troughs this year and rise by a cumulative 35bps at the all-property level over the following few years. Rental growth is unlikely to be able to provide much offset to prevent falls in capital values in 2023-24, with structural changes dragging on the retail and office sectors. This will leave annual total returns languishing in low single digits on average over the forecast. Beyond 2022, we think retail will overtake industrial as the best performing sector, while offices are expected to underperform.

23 June 2022

More from Amy Wood

European Commercial Property Update

Italian capital values to take a hit

Italian prime property values continued to make solid gains in Q1. However, with the economic outlook downgraded and larger increases in property yields expected over the next couple of years, capital value growth is set to slow sharply and by more than in other euro-zone markets. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

11 May 2022

European Commercial Property Update

Office yields most vulnerable to rising interest rates

While the low level of prime industrial yields compared to history leaves the sector vulnerable to rising interest rates, a fair value analysis that incorporates our expectations for rental growth suggests that office yields could come under more upward pressure in the next few years.

4 May 2022

European Commercial Property Update

War impact reinforces investment slowdown

While Q1 investment data showed further strength, the impact of the war in Ukraine on investor sentiment, economic growth and interest rates support our view that pan-European (excl. UK) investment activity will slow further ahead.

29 April 2022
↑ Back to top