Surge in yields has further to run

While we had expected the rise in risk-free rates and upcoming recession to boost yields, the speed at which they have increased has been surprising. All-property equivalent yields rose by a total of 78bps in October and November, reversing all the compression seen since mid-2020. And with property still looking overvalued, yield gains have further to run. By contrast rental growth has held up so far, particularly in the office sector. But as the recession starts to bite, rental growth will turn negative in all sectors bar industrial. After declining by 7.7% y/y in November, all-property capital values will therefore continue to fall. We now expect a peak-to-trough drop of 20% by the end of next year.