Substantial upgrades to industrial and apartments this year

The economic recovery continues in earnest, but this is raising questions about quite how transitory the current high rates of inflation are. We think that core inflation will stay elevated, which will force the Fed to push up rates in late 2023, with bond yields climbing to 2.5% in the meantime. Nevertheless, given the strong prospects for NOI growth in the industrial and apartments sectors, we think these still look fair value. Returns there should average 7% p.a. and 6% p.a. respectively in 2021-25. But the reverse is true for retail and offices. Although yields remain elevated in those sectors, we see occupancy and rents falling further in the next two years, leaving them looking expensive at current pricing. We therefore think yields need to climb further and capital values fall further before they look attractive. As a result, we are forecasting average annual returns of just 4.5% p.a. for retail and 2.5% p.a. for offices.