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Yields stabilise, but banking crisis may slow recovery

Yields have stabilised since the start of the year, with the 8bps rise in equivalent yields over January and February much smaller than the 64bps increase over the final two months of 2022. And with the UK not as exposed to the banking crisis as other countries, we expect yields to continue to rise only gradually this year. Nominal rental growth has held up well so far, with high inflation helping landlords push through hikes. But that will change this year as inflation falls back and the economy enters a mild recession, making a small decline in rents likely. That means capital values will see a further 5% fall this year for a peak-to-trough fall of 20%. Further ahead, tightening credit conditions thanks to the banking crisis means the recovery in investment and construction is set to be slower, with the office sector looking particularly exposed as the shift to hybrid work weighs on demand.

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