Valuations worsen, but office and retail still fair value

Higher alternative asset yields and falls in office and industrial yields contributed to a further deterioration in property valuations in Q3. The decline in government bond yields since then, which has been reinforced by concerns about the new virus variant, could provide some reprieve in Q4. But looking further ahead we expect government bond yields to rise again and weigh on property valuations. Nevertheless, with the gap to government bond yields still wide, we don’t think this will result in upward pressure on property yields until after 2023. As such, we think there is still scope for property yields to fall before then, not only in the industrial sector where the outlook for rental growth is solid, but also for retail as valuations are supportive and rental prospects have improved.