Rising bond yields point to deteriorating valuations

The valuation of industrial and offices deteriorated compared to bonds and equities in Q2 on account of falls in property yields. Meanwhile, retail yields stabilised, leaving valuations broadly unchanged. With government bond yields set to gradually rise as economies continue to recover, valuations are unlikely to find much reprieve in the coming quarters. That said, we still expect industrial and office yields to end this year lower. For industrial, the positive rental outlook should allow yields to fall despite stretched valuations. And for offices, although the sector’s rental prospects are relatively weak, supportive valuations and a focus on prime assets mean that yields can fall further. In contrast, the retail sector’s poor rental outlook suggests that yields will need to rise further to attract investor demand.