Andy Brunner, Investment Strategist at Morningstar OBSR, says:
“The fundamentals for UK commercial property suggest returns from the asset class could exceed 10% for a third consecutive year in 2015. Commercial property offers a very high starting yield, the prospect of solid capital growth and a pickup in rental growth in the year ahead.
“Income is tremendously important to UK commercial property total returns. From 1987 to date, the IPD All Property index has produced a total return of 900% (9.0% p.a.), of which income has contributed nearly 80% and capital values just 20%.”
Opportunities from supply constraints
“Contrary to the perception that London is one large building site, the reality could not be more different. Indeed, there is very little high-grade property currently available with few developments in the pipeline from 2015 through to 2017. The consequence is that rents will continue rising over the next few years given on-going supply constraints.
“Opportunities outside of London persist and we expect further capital value growth in 2015. There is a shortage of high quality prime space in the regions, where the availability of Grade A stock has fallen by nearly 40% over the last four years or so. This shortage should continue through 2015, despite an additional five million square feet of Grade A development coming onto the market over the next several years.”
“The main risk to the asset class comes from its dependency on the health of the UK economy; the recovery has been instrumental in generating increasingly positive occupier confidence over the past eighteen months. Interest rate increases are of growing concern, yet, while the BOE is expected to raise them next year, they may be delayed until Q4 and any increase will be gradual and likely have little negative impact for commercial property. In contrast, the May general election could create a period of uncertainty, leading to some deferral of purchases by both domestic and overseas investors.
“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. Current forecasts of 9-10% total returns for 2015 could well be revised higher as the year progresses.”
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