Structural factors to hold back office and retail recovery

Although the near-term economic outlook remains weak, vaccine developments pave the way for a rebound in mid-2021. However, we think that the rental recovery in property markets will be more gradual. This reflects that structural headwinds remain for retail and office property because of the growth of ecommerce and an accelerated adoption of remote working. In contrast, industrial rents will be supported by structural factors and the recovery in economic activity. Meanwhile, although investment has fallen sharply, there has been little sign of a repricing, at least outside of the sectors hit hardest by the virus such as retail. Combined with supportive property valuations, we think that there is scope for all-property yields to edge down over the coming years. As such, following a less steep drop in all-property capital values than previously expected of about 4% y/y in 2020, we now think that values could return to pre-virus levels in 2022.