Returns to stabilise in 2023 after brutal 2022

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.