Total returns on property investments outperformed the FTSE 100 and Gilts throughout the first quarter of 2015 with global real estate firm Colliers International forecasting further yield compression of 30 bps by the end of the year.
Colliers continued to predict stronger occupier markets in 2015, especially the office sector, with all-property rental growth up by 4.2%pa, total returns at 13%pa, and capital growth of 7.5%pa.
Dr Walter Boettcher, Colliers International Research Director and Economist, explained, “Though London is still perceived as a safe haven, it was evident in Q1 2015 that increasingly international investors have been tempted away from the South East and into the northern regions where yields are higher.”
André James, Colliers International Head of National Investment, commented, “The weight of capital seeking a home in the UK is set to cause further yield compression throughout 2015. We are already seeing signs of this yield improvement particularly in the industrial and alternative investment sectors.”
The office market is set to be the strongest commercial property asset class for 2015 according to Colliers with total returns predicted at 16.4%pa, rental growth 8.2%pa and capital growth of 11.4%. Central London is expected to be the main driver with exceptional demand and limited stock across the West End, City and Midtown. In particular, the West End is expected to see rental growth reach 11.1% in 2015 with the City following (9.6%) and Midtown (8.3%).
Yields are expected to harden further by 30 bps points in 2015 in Central London as a whole, despite yields already falling to historical lows in the most sought-after submarkets.
Further afield, Manchester and Birmingham’s current lack of Grade A office stock is driving rental growth, which echoes throughout the regions.
Colliers expects to see rental growth hit 3.3% in 2015 in the UK, outside of London and the South East. Yields in the South East and the rest of the UK are likely to move in substantially by 60 bps and 40 bps respectively.
Colliers estimate retail rental growth to reach 1.5%, capital growth 4.9% and total return 10.4% by the year end. More specifically, Central London retail rental is anticipated to see rental growth hit 7.7% by December 2015, benefiting from higher spending and increased visitor numbers from Asia, as a result of the relaxed UK visas, and the US, as the dollar strengthens.
Logistics and Industrial
Within the Industrial and Logistics sector, Colliers anticipates total return to reach 14.1%pa by the end of 2015, rental growth 4.7%pa and capital growth 7.8%. Andre explained, “A low inflation/deflationary environment, a sizable quantitative easing programme and better economic growth in the Eurozone – the UK’s main trading partner – should provide a boost to exports.
“When combined with the relatively low base of industrial rents, the lack of good quality supply and lower oil prices feeding through to companies’ profit margins, we expect rental growth to reach 4.7% in 2015 and average 3.1% pa in the five years to 2019 as these markets recover from a long period of stagnation.”