Aviva Investors has raised its 2014-18 UK commercial real estate annual average total return forecast to 8.9 per cent, from 6.5 per cent earlier this year, as the as the near-term outlook for the asset class strengthens.
Chris Urwin, global research manager, real estate, says: “We have raised our annual average total return forecast for UK commercial real estate between 2014 and 2018 to 8.9 per cent as factors influencing the near-term outlook for the asset class have strengthened.
“Real estate still remains attractively priced relative to other income producing assets and we expect capital growth to remain strong in the near-term. Under our base case economic scenario the prospects for returns in 2015 also look strong.
“Thereafter we continue to expect a slowdown as result of rising government bond yields. We expect the biggest impact to be felt on prime markets, such as Central London, which have historically been correlated with gilt yields. Nonetheless, we do not expect a dramatic impact on prime yields as the reasons behind the expected higher interest rate rises are positive. This means that occupier demand is likely to offset some of the negative effects of rising yields on pricing by real, or anticipated, future rental growth.
“Over the five-year forecast period we expect higher yielding sectors will outperform both on an absolute and risk-adjusted base. However, investors should be wary of markets threatened by obsolescence and over-rented assets.”
“Secondary and regional offices strategies remain appealing, but market sentiment has already been strong and transaction pricing is frequently well ahead of valuations. This means time may be running out for investors to gain from the cyclical opportunity.
“UK institutions and overseas investors have continued to be highly active in the UK real estate market. In the six months to March 2014, we saw the highest level of new investment by UK institutions since 2010, whilst overseas investors remained active. Looking ahead we expect to see significant inflows from a wide range of overseas investors complemented by institutional investment.”