Total returns in the commercial property sector are forecast to reach 19 per cent, two per cent higher than the IPF Consensus’ August forecast. Driven by 70bps of yield compression, this is the highest return since 2005 and reflects the improved investment environment.

Colliers’ latest Real Estate Investment Forecast predicts record total returns based on expectations of on-going extraordinary yield-driven capital growth of 13 per cent, with total income returns of 5.6 per cent. The rental outlook has also improved substantially, now expected to reach 2.7 per cent growth, up from the 2.3 per cent expected at the start of the year.

Walter Boettcher, EMEA Chief Economist, Colliers International commented: “Underlying economic drivers have improved over the course of the year and direct property investment remains strong with Colliers forecasting near £60 billion in UK transactions by year-end– the highest since 2006. The weight of money coming into the UK from international investors, especially Asian capital, is showing willingness to invest up the risk curve (including UK regional markets), but is also continuing to dominate the central London market, where investors are already paying sub five per cent yields in the City and sub four per cent yields in the West End.”

“Performance is being supported by improving occupational markets in a setting of UK-wide expansionary business investment, with the service sector showing especially strong growth (one per cent quarter-on-quarter in Q2 2014). UK financial and business services growth reached 6.1 per cent year-on-year in Q2 this year, the strongest level since the late 1980s. Purchasing manager indices suggest that this economic momentum will be carried forward into 2015, bringing increased impetus to the property investment market.”

Offices are expected to outperform over the five year period, with consistently strong rental growth, averaging 4.9 per cent, supporting higher capital value growth once yield compression has fallen out of the equation.

Rising take-up and falling vacancy is driving record rental growth of 9.2 per cent across Central London offices this year; the current development pipeline is not expected to weigh materially on growth out to 2016. Regional offices have pockets of supply-shortages and little development scheduled, so rental growth is expected to accelerate over the next three years.

Due to structural change and challenging occupier markets, retail is expected to underperform offices and industrial. The booming global retail market has positioned Central London retail as the stand-out performer, with per annum rental growth forecast at 4.4 per cent over the forecast horizon, but a stronger housing market has also provided optimism around retail warehouses. High streets (excluding London), shopping centres and supermarkets will all see modest growth, but it will lag behind other sectors.

Industrial and Logistics
The lack of good quality supply is already driving nationwide rental growth in the industrial market. Industrial total returns are expected to lead this year at 24 per cent, driven by a combination of strong income returns (6.4 per cent), and yield-driven capital growth, anticipated to reach 16.4 per cent. Eurozone downside risks aside, the manufacturing outlook remains positive; domestic demand is strong and, coupled with the current lack of supply, will drive record levels of rental growth over the next five years.

Gavin Noblett, Senior Property Economist, Colliers International, said: “Looking further forward, we expect yield compression to moderate in 2015, stabilise in 2016, with outward movements likely in 2017 in response to rising interest rates; nevertheless, capital growth will remain positively driven by stronger rental performance.”