The surge in yields seen in 2022 will not be repeated in 2023. With much of the repricing occurring last year we think all-property equivalent yields will see only a modest rise of 30bps this year. But rents will be hit, as the dual drags of higher interest rates and inflation pull the economy into a recession, with only industrial avoiding a fall. That means total returns will come in at close to zero in 2023, before an economic recovery and fall in yields help returns average 6.3% p.a. over 2023-27. With capital values set to be a less important driver of returns sectors with a healthier income return – such as retail and leisure - are set to outperform. Strong rental growth will support industrial returns, while offices will struggle.
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