Recession to hit rental growth as yields rise

The surge in interest rates in recent months has quickly been reflected in property yields, and as a result we have brought forward some of our forecasted rise in yields from 2023 into 2022. But with gilts yields set to fall back next year we still expect a peak-to-trough fall in all-property capital values of around 15%. As the most overvalued sector, we expect industrial will see a larger drop in values of around 20%. The upcoming recession will cut demand and weigh on rents, with offices set to underperform with rental growth of -0.3% p.a. in 2023-26. As capital values drop income will be a key driver of returns, and as a result we expect retail will see total returns of 6.7% p.a. over the 2023-26 period, compared to returns of 5.3% p.a. at the all-property level.