Commercial property returns forecast to halve in 2016

Total returns are forecast to reach 6.5% in 2016, less than half of the 2015 figure of 13.8%. Returns in 2014 stood at 19.3%.

Cluttons said that although the overall pace of growth has slowed, the market is not homogenous and so while rent returns may rise in some areas, they will remain static in others.

Cluttons head of research, Faisal Durrani, said there are some “challenging headwinds” ahead for the UK commercial property investment landscape.

“Chief of these is of course the risk of a Brexit and the deteriorating global outlook”, said Durrani.

“The uncertainty and nervousness being fuelled by the in-out EU referendum is impacting the value of sterling and the volume of property transactions.”

He said that if the UK was to leave the EU, property values would likely fall. However, if the UK stays in, a rise in the value of sterling could make investments here look a lot more expensive from abroad.

The estate agency’s head of UK valuations, John Barrett, said commercial property remains fairly priced in comparison to other markets, with a current income return of 4.8%. In contrast, 10-year gilts currently yield around 1.5%.

“This means that commercial property is in a much more robust shape to cope with any economic downturn and unlikely to crash when compared to 2007/8,” said Barrett.

“Future performance from direct property investments will need to come from the traditional fundamentals of rental income growth and asset management initiatives such as change of use, lease restructuring and refurbishments.”

Cluttons predicts industrial total returns in 2016 to reach 7.5%, overtaking office total returns at 6.6% in 2016.
In 2015, total returns from offices (at 18.2%) exceeded industrial (17.3%).