Real Estate

Commercial

Rental growth hits a three-year high

Commercial property’s recent good run continued in October. The annual rate of rental growth surged ahead after only breaching positive territory for the first time in almost two years during August. However, given the economy’s headwinds over the near term, we suspect that property markets will struggle to maintain their current pace. Once this year’s rebound passes, we expect total returns to soften over the forecast period, as yields stabilise and structural changes within retail and offices weigh on rental growth.

3 December 2021

US Metro Employment (Oct.)

The easing of the Delta wave of infections in the South boosted leisure & hospitality hiring in October. Meanwhile, office-based jobs rose in all 30 metros, following widespread declines in September. That left office-based employment above its pre-COVID level in 17 metros.

2 December 2021

Fair value analysis points to one more year of yield falls

Against both our proprietary in-house valuations and a more traditional fair value analysis, real estate looks cheap despite recent yield falls. Indeed, our analysis suggests yields could fall by 30bps by end-2023 and still be fair value. But as this would leave property looking overvalued by 2024, we think the all-property yield is likely to fall by more like 15bps in the next 12-18 months. As apartment valuations will come under pressure first, yield rises in that sector are likely to start by early 2023.

1 December 2021
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CEE yield compression to continue into 2022

After surprising on the upside this year, we think that the broad-based decline in Central and Eastern European (CEE) property yields will continue in 2022, albeit at a more modest pace. But with higher bond yields eventually weighing on valuations, we expect property yields to edge up from 2023.

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.

Lending to commercial property (Oct.)

A drop in repayments and rise in development activity resulted in positive net lending in October for the first time since March. Despite this turnaround, credit conditions will remain tight and uncertainty about the recovery will continue to weigh on lending in the near term.

29 November 2021

IPF Consensus Forecasts (Nov.)

The resilience of the commercial property market has led to further upgrades to the IPF Consensus view for this year, albeit still below our forecast. Beyond this year, we are more downbeat about the outlook than the consensus given our expectation that work-from-home will have a more lasting impact on offices.

26 November 2021

Are flexible offices making a comeback?

Over the last two years, serviced offices have seen more upheaval than most other real estate sectors. But there have been some encouraging signs over recent quarters and long-term trends may have moved in their favour, though we don’t expect improved fortunes for flex space will be enough to change the outlook for offices as a whole.

25 November 2021
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