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Returns to remain soft

Regardless of the outcome of the election and Brexit, we expect all-property returns to be weak over coming years. Indeed, even if a deal is secured and economic growth picks up, we expect weakness in the retail sector to weigh on all-property rental values. In the near term, rising property yields in response to the bleak outlook for the retail sector and prolonged Brexit uncertainty are likely to weigh on capital values. If a deal is secured, we expect rising bond yields to put further upward pressure on property yields from next year. If a deal is not secured, we expect property yields to rise more quickly early next year, particularly if there is a no deal. However, lower interest rates and bond yields are likely to prevent property yields rising much higher over the following year or so.
Andrew Burrell Chief Property Economist
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Signs are positive but headwinds remain

Capital growth was solid in April at 0.5% m/m, although that reflected a slight reduction from the rate seen in March. Looking ahead, we expect the recovery in economic activity to continue which will support demand for commercial property. However, structural headwinds remain in the office and retail sectors, so any recovery is likely to be slow.

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Scandinavia & Switzerland: Upside risk to industrials

Capital value growth improved in Scandinavia and Switzerland in Q1, helped by the easing of virus restrictions and by the improvement in economic activity towards the end of the quarter. The uptick in the pace of Scandinavian industrial capital value growth in particular poses upside risk to our end-year forecast. Looking ahead, the faster pace of vaccination and falls in new virus cases point to a further rebound in economic activity. This will support the property recovery, although the structural headwinds from more online spending and firms adjusting their office space will weigh on retail and office performance.

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Emerging Europe: Re-opening won’t stop values falling

The fall in all-property rents, dragged down by office and retail sectors, meant that annual capital value growth remained in negative territory in Q1, despite the surprise fall in yields. Looking ahead, while the faster pace of the vaccination rollout and fall in new virus cases should pave the way for a swift rebound in economic activity, the recovery in property values is likely to prove much slower. Indeed, despite the improved occupier outlook, structural headwinds from more online shopping and remote working will continue to weigh on the office and retail sector. In turn, we expect prime rents in these sectors to extend their declines this year, outweighing any rental gain in the industrial sector. And we don’t expect the dip in yields in Q1 to be sustained, as higher retail yields will push up all-property yields. As a result, all-property capital values are set to drop again this year.

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