Income returns to dominate as yields hold steady

The rise in gilt yields following the Iran war has so far not led to any increase in property yields, and we expect investors will largely look through what will be a temporary spike in risk-free rates. That said, we also doubt the fall in the 10-year gilt yield to 4.25% by end-27 will lead to any property yield compression. Capital value growth will therefore be limited to rental growth, which will be modest given the relatively slow GDP growth we are projecting. We expect annual all-property rental growth to slow from 3.6% in 2025 to 2.7% in 2026 and 2.1% in 2027, before seeing a gradual recovery. Total returns of 7.1% p.a. over 2026-30 are therefore solid, if not spectacular. With capital value growth limited, those sectors with a higher income return, such as retail and leisure, are therefore set to outperform.