Final value falls deferred again, but US CRE still overvalued

Our view that capital values still need to fall by 5% at the all-property level keeps our forecasts below consensus. Based on our forecast of a long-term 10-year Treasury yield of 4.5%, appraised cap rates look too low given the outlook for relatively meagre rental growth in the coming years. We continue to think that a rise in forced sales will be needed to trigger final value reductions to bring the market back to fair value. At the sector level, we retain our long-held view that retail will outperform over the 2025-29 period with returns of 7.5% p.a., with apartments second at 6% p.a. But as the most overvalued sector we think industrial will perform poorly, with returns of less than 5% p.a., underperforming the other sectors, including offices, where we forecast total returns of around 5-5.5% p.a.