The strong performance is a reflection of the merits of the asset class relative to others.
“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,” Levis continued.
“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 cent per year.”
Within the asset class Levis predicts the industrial sector will overtake offices as the strongest sub-sector.
“It’s now more than two years since the current rally in real-estate values began,” he said. “The industrial sector has now overtaken offices as the strongest sub-sector, delivering a 4.8 per cent return in the three months to August compared to 4.4 per cent from the office sector. By contrast the retail sector trails, with a return over 2.2 per cent return over this timeframe.”
Levis said a ‘rental recovery’ is now becoming entrenched. “The pace of capital growth has eased over the past three months but remains high amid strong investor demand. 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.”
He noted that ‘intense demand’ for central London office space in the second quarter saw total take-up jump almost 30% from the first quarter, driving rents significantly higher.
“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,” he added.
