Investment yields are stabilising in most commercial real estate sectors with “mild” compression expected in almost all sectors by the end of the year, according to Colliers’ latest Real Estate Investment Forecasts report.
Yields are beginning to compress across most retail segments, led by standard shops (-17bps) and shopping centres (-15bps), and hotel investment recorded its strongest H1 figure since 2015.
Colliers expects capital values to increase across most sectors in H2, with a predicted rise of 4.2% at the all-property level in 2024, accelerating to 6.2% in 2025.
The combination of sustained rental growth and mild yield compression means that after two years of declines, total returns will rise by 9.3% in 2024, peaking at 10.9% in 2025, before moderating over the remainder of the five-year forecast period.
Looking ahead, on a sector-by-sector basis, demand for retail assets is expected to improve further this year, with retail warehouses predicted to be the sector’s star performer.
Investment volumes are likely to remain weak for offices in the coming months, but Colliers forecasts that liquidity in the office market will return when interest rates and debt costs fall further. Office yields continue to rise, but are predicted to stabilise over the coming months with some re-compression later in the year possible.
Rents will continue to rise over the forecast horizon for the industrial market, although growth rates will slow further from the exceptionally strong rates recorded during 2021 and 2022, to more sustainable levels of between 3.5-4.5% per annum. Yields are expected to stabilise over the coming months and then re-compress later in the year.
Oliver Kolodseike, director in the research and economics team at Colliers, said: “The outward shift of yields appears to be coming to an end, with Q2 data showing a movement of just 3bps across all property. We expect a stabilisation and ultimately yield compression later in the year when interest rates and gilt rates come down further, with equivalent yields across all sectors – other than leisure and offices – ending 2024 at a lower level than in 2023.”
John Knowles, head of national capital markets at Colliers, added: “We’ve seen significant yield movements since the middle of 2022, resulting in a collapse in capital values across almost all sectors. However, it’s pleasing to see that values are now stabilising, with some markets, such as retail and industrial, already recording increases. With stronger prospects for economic growth and falling interest rates in the months ahead, we expect to see a continued improvement across all sectors, with total returns expected to increase this year and next.”
