Higher interest rates mean that real estate looks significantly overpriced in all sectors. The latest activity and performance data suggest that a correction is underway, but as we now think the 10-Year Treasury yield has peaked, we expect the price correction to be smaller than in our previous forecast. Alongside steady rent growth, a yield rise of 20-30ps over the next 18-24 months will only pull capital values down by around 3% at the all-property level. Total returns should reach 10% this year, but then will be much weaker in 2023, at around 2.5%-3%, before gradually picking up in 2024-26. For the 2023-26 period, we continue to expect retail to be the top performer. But the low level of yields in apartments and industrial mean that those will underperform as yield rises make a bigger dent in capital values.
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