While the recent economic data have surprised on the upside, property market indicators were broadly worse than expected in Q4. Occupier demand softened, particularly in the office and apartment sectors, as concerns about the outlook weighed on firms and households. And, with the Fed’s rate hikes not over and the 10-year Treasury yield ending the year more than 200 bps higher, it was no surprise to see an acceleration in yield rises in Q4. The all-property capital value fall of 4.4% q/q was the largest since Q3 2009, but we expect to see similar markdowns in Q1 and Q2 of this year as yields rise further. As a result we think values could fall by another 10%, led by the apartment sector. Retail should outperform, albeit largely by virtue of having had longer to deal with its structural issues, with values having already seen a drop of 19% since their peak in 2017.
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