Aviva Investors has reaffirmed a five-year all-property total return of 8.8% per annum for the UK real estate market.
“In the near-term we expect returns from UK real estate to be strong,” said Richard Levis, global real estate analyst at Aviva Investors. “This is largely because real estate is likely to remain attractively priced relative to other asset classes, especially government bonds. When the interest-rate environment begins to normalise, however, we believe the downward pressure on yields will abate. We therefore think performance is likely to moderate over the long-term, especially when yield compression gives way to modest rental growth as the main driver of returns.
“Our five-year all-property total return forecast for 2015 to 2019 remains relatively unchanged from last quarter, averaging 8.8% per year.”
“It’s now more than two years since the current rally in real-estate values began. The industrial sector has now overtaken offices as the strongest sub-sector, delivering a 4.8% return in the three months to August compared to 4.4% from the office sector. By contrast the retail sector trails, with a return over 2.2% return over this timeframe.”
Levis said capital growth is easing but a rental recovery is becoming firmly entrenched.
“The pace of capital growth has eased over the past three months but remains high amid strong investor demand,” he said. “Not surprisingly, rental growth remains strongest in prime London offices and retail, with continuing supply constraints and strong occupier demand suggesting that rents here have yet further to go. Encouragingly, the rental picture is also noticeably strengthening in the UK’s regional markets, providing greater confidence for the medium term.
“Intense demand for central London office space in the second quarter saw total take-up jump almost 30% from the first quarter. This demand is driving rents significantly higher. Regional office markets are also gaining ground as limited supply, especially of grade A assets, drives up rents.
“The occupier market recovery is now spreading to regional markets and to secondary properties. In retail, rising retail sales and an ongoing recovery in wages is gradually feeding through to retail occupier markets. Rents in the sector are rising although they continue to be led by central London where limited vacancy, booming tourist numbers and ardent demand from international retailers is driving rents to new records.”