Third Year of Double Digit Returns forecast for UK Commercial Property

Posted on 7 January, 2015 by Neil Bird

A third consecutive year of double digit returns from UK commercial property assets is expected in 2015, according to investment strategists at Morningstar OBSR.

Third-Year-of-Double-Digit-Returns-forecast-for-UK-Commercial-Property

Last year the IPD UK All Properties Index recorded returns of 17.5 per cent, following a figure of 10.9 per cent in 2013.

The strong recovery of the market over the past two years can be seen when these totals are compared to returns of just 2.4 per cent in 2012.

As we enter 2015, market fundamentals suggest that returns from the asset class could exceed 10 per cent once again, with solid capital and rental growth forecast for the year ahead.

Unsurprisingly rents are expected to rise in London where a dearth of development completions over the coming two years will have a marked impact on supply. However, the capital is not the only market where capital values are expected to increase this year.

“There is a shortage of high quality prime space in the regions, where the availability of Grade A stock has fallen by nearly 40 per cent over the last four years or so,” said Andy Brunner of Morningstar OBSR.

But, unlike London, there is a plentiful supply of stock in the regional development pipeline, with an estimated 5 million sq ft expected to come to the market over the next few years.

The principle threats to the commercial property market at the present time are a downturn in the UK economy or a rise in interest rates.

Another factor in the first quarter of 2015 is the uncertainty surrounding May’s General Election, which could lead some investors to delay transactions until the outcome is known, Brunner believes.

“Overall, the economic environment should remain favourable for commercial property with the asset class supported by high levels of income together with capital value and rental growth,” he explains.

“Current forecasts of 9 to 10 per cent total returns for 2015 could well be revised higher as the year progresses.”




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