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Rental Growth to Drive Returns for Commercial Property

By +Eric Jafari

Rental growth drivenCommercial property will experience a strong 2013 across most market segments, with rental growth driving returns. This is the prediction of Jones Lang LaSalle, which claims things are starting to look up for UK real estate.

Forecasts have indicated all-property returns will reach 4.6 per cent this year, compared to 3.4 per cent recorded in 2012. Over the five-year forecast period, average returns increase to 6.2 per cent. However, this is still lower than long term averages, indicating there must still be caution when entering any market - the days of the boom are yet to return.

The strongest returns can be found in the office market, at 7.1 per cent per annum. This is primarily driven by units in central London, but increases will be noted throughout the country, perhaps indicating a return of business confidence. The industrial sector will also perform well over the five-year forecast period, with average returns of 6.2 per cent. Distribution Warehouse will prove to be the most lucrative market.

Unsurprisingly, the Retail sector is expected to take another hit, with weak returns resulting from a poor 2012 performance. Shopping centres are lagging behind the most, but from 2015 onwards, the industry is expected to experience a recovery, thanks to a stronger economy. However, in the near-term the market will remain subdued, as the financial crisis continues to constrain consumers. Nonetheless, rents will remain stable, with the five-year forecast remaining below its long term trend. Retail warehouses will perform better than most sub-sectors, with rental growth averaging 1.7 per cent per annum.

Jones Lang LaSalle believe returns will be driven by rental growth in the long term across all sectors, with yields remaining stable. However, this won't begin to kick in this year. Andrew Burrell, head of forecasting at Jones Lang LaSalle, said: "Another weak year is forecast for rental growth, aside from London offices. Economic recovery brings an upturn from next year, but even then increases lag inflation over the longer term."

08 April 2013

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Commercial Property Leasing