Real estate total returns set to grow by 3.8% this year

Total returns in property are forecast to rise by 3.8% in 2021, led by industrial and grocery retailing, according to a new report from Colliers International. Colliers estimates that total returns will comprise 4.6% income return and -0.8% capital growth. Total returns are then expected to grow by 6.3% in 2022 and 5.5% in 2023 as the market recovers from the coronavirus pandemic’s disruption. Over the next five years, Colliers predicts that industrial and supermarkets will be the best-performing sectors. All-property equivalent yields are expected to stay relatively stable this year, with outward movement across the retail and leisure sectors offset by mild compression in industrial and offices. Colliers said yields will then shift out, in line with trends linked to the Bank of England base rate and 10-year government bond yields. Oliver Kolodseike, deputy UK chief economist at Colliers, said: “There are a range of forecasts out there for the UK economy, some more pessimistic than others, but at Colliers we fall on the slightly more optimistic side. The second quarter of the year should bring with it renewed GDP growth. “We estimate there is a glut of personal savings totalling £100bn as people save on commutes, dining out, holidays and so on. How far this is unleashed in the second half of the year will dictate our recovery, but we imagine it will be a significant amount.” What office returns might look like Colliers said most of the rental declines in the office sector will occur during the first half of this year, with H2 boosted by the vaccine roll-out and the expected return to the office. However, it pointed out that “best in class” property is set to stay in short supply, allowing prime stock to resist downward rental pressure. The South East and regional office markets are expected to post higher returns than London in 2021, with 3.5% growth expected in the South East and 3.7% in the rest of the UK outside London. Total returns in central London are predicted to rise by 1.4%. Total returns across offices are on track for 2.3% growth this year, consisting of 3.9% income return and capital growth of -1.6%. The outlook for industrial Colliers said it expects industrial yields to harden slightly in 2021 before stabilising next year, with a “very mild” outward shift afterwards. Rental growth is expected to remain relatively strong, with 2.6% annual rental growth predicted for this year. Both London and the South East are expected to outperform, with 3% and 2.9% rental growth forecast respectively. Total returns in industrial are predicted to grow by 7.5% this year, slowing to 6.3% in 2022 and 5.3% in 2023. Len Rosso, head of industrial and logistics at Colliers, said: “Appetite for prime industrial assets, both multi-let and single-let distribution warehouses, remains strong. “We are expecting new overseas entrants to chase industrial assets this year, while established UK investors will be keen to further increase their portfolio weighting towards industrial, as the sector continues to offer the most security, rental growth and returns.” Retail returns to inch up Total returns across retail are expected to edge up by 1.4% this year, after a 12.4% dive in 2020. This uplift is expected to be driven by income growth, with capital growth set to remain in negative territory over the next few years. Retail warehouses and supermarkets will boost the sector’s performance in 2021, with all other sub-sectors set to post negative total returns growth. To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette