Total returns in the commercial property sector could top 17 per cent in 2014, the highest rate of growth since 2006, according to its second-quarter forecasting review by global property advisers, Colliers International. Following IPF Consensus forecasts last week which expects headline total returns in 2014 to reach 13.7 per cent, Colliers International forecasts an even more remarkable turnaround for the market, a total return of 17.3 per cent.

Colliers’ latest ‘REIF in Brief’ research reveals that improving occupational markets and falling yields has led to a bullish total return forecast, with capital growth expectations of 11.1 per cent and income returns of 5.7 per cent.

Yield compression is cited as the main driver of the total return upgrade this quarter, with 60bps compression expected by the end of the year. The report reveals that this is being driven by record net fund inflows from retail investors and fresh sources of overseas capital from Chinese and Taiwanese insurance companies driving down yields. Further, Colliers’ report shows that secondary assets are also increasingly targeted and with yields still high, provide scope for significant falls.

Gavin Noblett, Senior Property Economist for Colliers International, said: “Historically, property yields have not moved in smooth and steady 10bps increments over the course of a year.  More often, the property cycle moves forward suddenly and very quickly, as it is presently. We have already seen yields fall nearly 20bps in the first quarter and conditions look right for up to 60bps of compression by the end of the year with some subsectors seeing up to 100 bps of movement. IPD All Property yields are roughly in line with their long-term average and we see scope for significant compression, particularly in regional locations and secondary assets where occupiers markets are improving and yields remain relatively high.”

At a sector level, whilst yield compression of varying degrees across all sectors is expected, Colliers forecasts that regional offices and UK industrial property will see more than all other sectors and regions. At a sector level, UK industrial will be the best performing sector, with total returns in excess of 20 per cent this year.

Rental growth was also  upgraded to 2.7 per cent in 2014, reflecting increased tenant demand, falling supply and stronger than expected rental growth on the Q1 14 quarterly IPD index. Colliers report reveals that Central London will continue to outperform the rest of the UK, particularly this year. However, Colliers’ longer-term view forecasts that growth expectations are curtained after this year, with five year total returns averaging 9.5 per cent.

Noblett continued: “The economy looks to be in a sustained period of above-trend growth, occupier demand is firming and many locations have a significant shortage of good-quality stock. Rental growth, although modest outside of London, is back on the agenda and the relative pricing between property and gilts continues to make property look attractive, particularly when you consider the benign outlook for inflation, which suggests base rates could stay on hold well into next year and only rise slowly thereafter.”

Dr Walter Boettcher, EMEA Chief Economist, Colliers International, added: “The all too infrequent combination of strong economic growth, benign inflation and low interest rates have together provided the confidence for property investors to take a serious look at a staggeringly wide-ranging set of assets differentiated by grade, class, sector and geography. Given the stock of relatively high yielding secondary assets, coupled with the wide range of actors and motives, there is great scope for substantial yield compression to drive total returns. Record fund inflows mean that UK institutions are in the fray along with foreign investors who are venturing out of central London in search of stock.”