A positive outlook
In aggregate, the outlook for the commercial property markets is positive. The main economic indicators from both the ONS and the high frequency surveys suggest the strong levels of growth will be sustained, which will be manifested in improved conditions in the occupier markets. Even though some markets had a surprisingly slow start to 2014, we remain confident that take-up levels will improve in the second half of the year. This will lead to rental increases, although secondary and tertiary retail is still the most likely sector to remain in rental decline.
All systems go for the investment market
In the investment market, it remains all systems go. The weight of money chasing commercial property has pushed growth in capital values into double digit territory and they are now back to where they were when Lehman Brother’s collapsed in September 2008. This has been driven by sustained yield compression, but with yields back to their peak in some markets, we do not expect this can be maintained for more than another 9-12 months.
Stock selection to become increasingly important
One of the reasons why yields have shifted inwards is the expectation that growth in rents will drive returns once the current phase of yield driven growth has run its course. The good news on this front is that the prospects for rents are good for London and South East offices and industrial, for the best placed regional markets and good quality retail, which will boost returns from 2015 onwards. Therefore, stock selection and avoiding low growth markets will be one of the main routes to success as we move through the second half of 2014 and in to 2015.
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