Consultancy firm Capital Economics has said that alongside a mild rise in yields, commercial property returns would fall from just under 10 per cent in 2022 to 3.7 per cent next year.
This comes as data from Asda’s latest income tracker showed disposable income for households in the UK fell by an average of 16.5 per cent annually. The supermarket noted this as the largest decline in accessible income since its records began in 2008.
Capital Economics said a drop in spending power would impact all property sectors, but consumer-facing markets such as retail and leisure could be the hardest hit. The firm also predicted that a slowdown in the jobs market could result in a decline in office demand.
However, this is expected to recover to an average return of six per cent by 2026.
Capital Economics believes inflation will reach 12.5 per cent in October, putting pressure on incomes and leading to higher interest rates which will, in turn, cause a recession. The base rate is also expected to rise to three per cent next year to temper this.
Office and retail
The firm said the office sector would underperform compared to other sectors as the jobs market slowed and home working became more prevalent.
It predicted office rents would rise by 1.4 per cent each year from 2022 to 2026 but increasing yields and slower rental growth would lead to small declines in values over 2023 and 2024. Returns of under five per cent per year are expected over 2022 to 2026.
Retail sales are set to fall as consumer confidence drops and continued home working will shift spending away from city centres into local areas.
Capital Economics said: “We think this out-of-town shift will last, to the detriment of urban high streets and city-based shopping centres.”
Annual retail returns hit 17.2 per cent in Q2. This is expected to ease though, with Capital Economics predicting returns of seven to eight per cent over 2022 to 2026, which is above the commercial property average.
Hotels and leisure
Capital Economics said after contending with the impacts of the pandemic, leisure and hotel businesses were now faced with an impeding cost-of-living crisis.
However, the firm said this might not result in lower demand as people might be able to dip into their savings. Further, to make up for lost time during the pandemic, people could opt to pay for services rather than goods.
Despite this, the rising cost of overall expenses will inevitably limit people’s ability to spend.
As a result, Capital Economics has revised down its rental growth predictions for the leisure sector. Following a one per cent annual rise in Q2, it now expects this to fall to negative one per cent by the end of the year before picking back up once inflation comes under control and real earnings recover.
The firm said the hotel sector would also suffer as both people in the UK and abroad cut back on leisure-based travel due to rising costs.
However, business travel should help to provide some demand for hotel stays and the weakened pound may also generate business from overseas.
Therefore, hotel rents will outperform the overall leisure sector with a 0.5 per cent annual rise in 2022 and a one per cent yearly growth next year.
