Latest results from the MSCI quarterly index show that all property total returns increased by 8.3% y/y in the 12 months to September, down from 9.3% y/y in the 12 months to June. The industrial sector remains the standout performer with MSCI reporting total returns 19.2% y/y in Q3 2018.
Oliver Kolodseike, Senior Property Economist at Colliers International said: “Although we expect an end to double-digit growth in 2019, as the sector will start to stabilise and investors spread their interest across the different sectors, the industrial sector will remain the standout performer for the fourth year in a row.
“All industrial equivalent yields reached a new record low of 5.34% in Q3. This is down a staggering 52bps from a year ago, highlighting that investment demand for this sector remains strong. We believe that yields will continue to harden this year before stabilising in 2019 and moving out thereafter.
“Retailers remain one of the demand drivers for industrial space, supported by a growing importance of online spending and the “want it now” consumer culture.
“Meanwhile, the quarterly index showed that total returns for offices slowed only slightly to 7.3% y/y, from 7.9% y/y in the 12 months to June while the retail sector saw returns easing to 2.9% y/y, down from 4.6% y/y in the 13 months to June. In contrast, some of the alternative sectors such as hotels and healthcare recorded stronger growth.
“Demand for alternatives is clearly strengthening, with yields for healthcare and hotels having moved in by 19bps and 32bps respectively over the past 12 months. Hotel yields are now standing at 4.24%. In the year to date, investment into alternatives stands at around £14bn, breaking through the £10bn mark for the fifth year in a row and making it the second-most sought after sector behind offices. The alternatives share of all UK commercial property investment is on course to reach a new record high in 2018, currently accounting for roughly one third of all transaction volumes.”
Colliers International forecasts total commercial property returns to slow marginally by year-end, before falling to a cyclical low of sub-4% next year.