Over the past nine months, the commercial property market has seen a marked rise in demand. UK property is very attractive to investors right now, with annualised returns of about 8.7 per cent forecast over the next three years.
As the economy improves and businesses are becoming more confident about their future profitability, investment is expanding and this is anticipated to lead to rental growth within the current domestic cycle. Although this may be more muted than in previous cycles, growth in the 2 per cent range is predicted in all markets.
The asset class delivered a total return of 2.8 pe rcent in Q3, and this rate was the highest level since the last quarter of 2010. Fourth-quarter returns for 2013 are expected to be even higher and will push annual returns to the 10 per cent range, which is a significant turnaround for a lower-risk asset class.
In the medium-term, all commercial categories are forecast to generate capital growth. The office and retail markets in central London should deliver returns in the double-digit range, and rental value growth will be converted into higher net incomes for landlords.
The regional markets are likely to attract more interest from investors but they will continue to be selective with assets and location.
Downward pressure on yields for prime stock and good secondary markets will continue due to the greater number of investors in the market and the lack of stock. Increased finance available for purchasers will also play a positive role as the year progresses.
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