Faster bond yield rises will limit prospects for capital values

The vaccine rollout and stimulus bill are unquestionably positive for the economy but may be a mixed blessing for real estate. Those two factors are probably most positive for the apartment sector, given that they have put more cash in the hands of Americans and will support jobs growth. But occupier demand in the other sectors is being driven by structural change that will continue regardless of the economic recovery. And one side-effect of the recovery is that interest rates will rise sooner. With risk-free rates rising and beginning to squeeze property valuations later in the forecast period, we have pencilled in small yield rises in the industrial and apartment sectors in 2024-25. As a result, on a five-year basis, we think industrial returns will struggle to reach 7% p.a. now, with apartments nearer 6% p.a. Indeed, while those sectors will substantially outperform in the next two years, retail looks more attractive thereafter.