Ignis Asset Management is forecasting an 11.5 per cent total return for UK commercial property next year, more than two per cent stronger than consensus expectations.
The latest IPF Consensus Forecast, published in November, quoted an average total return figure of 9.3 per cent for next year.
However, Ignis now expects stronger performance for the asset class, driven by a broadly equal combination of income return and capital growth. Over the next three years, Ignis forecasts an annualised total return of 8.7 per cent.
Ignis predicts offices will be the top performing sector next year with a total return of 13.8 per cent, followed by industrial and retail at about 10 per cent respectively.
While double digit return projections may stoke fears of a bubble in the asset class, Ignis believes property yields can sustain a moderate re-rating in the near term – due to relative pricing between the asset classes, combined with an improving economy.
George Shaw, manager of the Ignis UK Property Fund, says: “The majority of capital growth is expected to be generated by yield compression. This in part reflects the intensive competition for the limited number of quality assets available, as an increasing number of investors seek exposure to the asset class.
“We remain cautious in our view for rental growth, particularly beyond central London and certain ‘hotspots’ in the South East and micro-locations. The overall rental growth forecast figure remains modest and we would caution that a good deal of existing leases remain heavily over-rented as they approach expiry.
“Our analysis shows property yields can sustain a moderate re-rating over 2014, without moving into bubble territory. Since the market started to recover in 2009, a more appropriate allowance for price discrimination across markets has been applied.
“Average property capital values remain about 30 per cent below the previous peak recorded in 2007. Those sectors that continue to face fundamental challenges remain significantly behind, while markets with clear growth prospects have recouped a much greater proportion of those capital declines.
“We believe property yields can maintain a healthy margin ahead of gilt yields despite a forecast rise in gilt yields over the next five years. This view assumes property yields are not bid down to the extent seen in the previous cycle. We are confident memories of 2007 are recent enough to prevent the industry going there again.
“We are already recording increases in valuations across a range of our assets, many of which have been acquired in recent years,” Shaw adds. “Our portfolios comprise of high quality diversified assets, and our proactive approach to asset management is aimed towards securing and maximising income – which in turn will promote capital growth – and deliver substantial real returns to our investors.”