The latest Real Estate Investment Forecast from Colliers International forecasts total returns in office property to reach 7.2% in 2013, up from 2.3% in 2012, as private investors and property companies begin to show and appetite for higher yielding properties.

The report also suggests that the ‘first wave’ of sovereign wealth funds, having established local UK partnerships, will begin to diversify investment both by asset class and geography. A ‘second wave’ of sovereign wealth is now evident, and will seek partners and core investments. Prime regional assets may begin to attract greater interest as investors begin to diversify and search outside London for higher yields.

Dr Walter Boettcher, Chief Economist and Forecaster for EMEA at Colliers International, said, “Mixed portfolios offering ‘the good, the bad and the ugly’ are coming to the market from banks as they continue to offload distressed assets at a measured pace. UK institutions will continue to focus on core and core+ opportunities, with pension funds focussed on secure income, with overseas investors still driving the market for the foreseeable future, especially with sterling showing renewed signs of weakness.”

Below is a breakdown of the Q1 2013 Real Estate Investment Forecast by property sector:

Retail

Rental growth for the sector as a whole is expected to reach 1.5% pa over the 2013 to 2017 forecast horizon.  Outside Central London, rents are expected to fall by a further 2% in 2013 before stabilising in 2014, with positive growth not expected until 2015. Some pessimistic forecasts suggest that positive retail growth is not expected until 2016. Total returns for retail property is forecast to rise substantially from 0.9% in 2012 to 7.4% in 2013, with a peak expected in 2014 of 8.8%.

Offices

Central London will continue to bolster the sector over the forecast horizon, with a combination of moderate rental growth and further modest yield compression offsetting relatively weak income returns. Grade-A office supply may prove to be a key source of rental growth with most regional centres reaching rental ‘tipping points’. While prime rents in the City and West End are stable at £57.50 per square foot and £110 per square foot respectively, Manchester has reportedly reached £30 psf. 

Industrial and Logistics

Rental decreases are expected to cease this year, with an uplift of 1.5% is expected in 2014 rising to 1.9% in 2015. Yields are also expected to harden steadily, if modestly, through to 2016 with capital growth registering 2.6% in 2014.  Industrial distribution warehousing is forecast to offer a return of 10.8% in 2014, second only to London’s City and Mid-town office markets, which will offer a higher annual return of 11.1% also in 2014.