Returns underpinned by income

After a brief respite earlier this year, property yields are once again on the rise, driven by a further increase in gilt yields. We don’t expect a repeat of the surge seen last year, but we also think any compression beyond this year will be minimal as the spread between property yields and risk-free rates remains close to historical levels. Rents have held up better than expected, but an upcoming recession points to a slow down next year with outright falls for offices. Capital value growth will therefore average just 1.6% p.a. over 2023-27 at the all-property level. Compared to the past, total returns will therefore depend more on income. That implies higher income returns in sectors such as retail will mean they perform relatively well over the next few years, although industrial also does well thanks to decent rental growth.