‘Tough decisions ahead’ as Cluttons tones down forecast
Along with London, Manchester has outperformed the rest of the UK in economic growth, said the investment management firm. However, Cluttons also revised its all-property total returns forecast from 12% to 11%.
Cluttons IM tweaked its forecasts in its latest commercial quarterly examiner research due to record highs in inflation and associated interest rate rises, the cost of living crisis, and ongoing geopolitical uncertainty.
Also revised were the forecasts for all-property total returns for 2023 which have been downgraded from 7% to an anticipated 4%. This has impacted the annualised forecasts for the three years ending in December 2024 down from 8% to 7%.
Jamie McCombe, head of investment management Cluttons IM, says: “We have revised our forecasts down for this year, despite returns of 9.6% already seen by the end of H1 2022.
“We are expecting the market to slow in the second half of the year due to ongoing headwinds impacting demand, valuations and thus transactions. We have already seen total property returns fall from 5.6% in Q1 to 3.8% in Q2 2022 and with further uncertainty we are expecting this to fall much further in Q3 and Q4.
“Overall total returns have weakened from Q4 2021 and Q1 2022 already so over the year we will see a total decrease of 0.2% which shows the market is still strong but is weakening in comparison to those quarters.”
In terms of transactions, all property volumes have fallen 31% since the beginning of the year, suggesting that while there may be plenty of capital, investors are happy to sit on it for now.
However, there was also good news in the report. Regionally, Manchester and London outperformed the rest of the UK in terms of economic growth which should continue to have a positive impact on their respective commercial property markets both in terms of investment and occupier demand.
On the industrial side, investors are forecast to see 14% returns this year thanks to ongoing underlying rental growth – albeit this is slowing with 2.7% seen in Q2 vs 3.4% in Q1 2022. Industrials made up 27% of all investment transactions in the first half of the year, almost as much as central London offices which held at a steady 29% of transactions. Industrial yields continued to harden to 3.3% for all industrials and last mile logistics down to 2.5%.
London and Manchester industrials were rated in the top 15 worldwide for returns in 2021 according to the MCSI global index.
McCombe said: “The industrial sector continues to be the gift that keeps on giving for investors but with yields hardening so much, funds, in particular, may flip back to other alternative sectors where there is more value to be realised.”
Offices saw marginal rental growth of 0.1% over the quarter and all investment transactions of note were either in the City (57%) or West End (43%) meaning investors focused on core markets and did not venture to fringe locations.
Retail saw a marginal rise in rental growth from 0.1% in Q1 to 0.2% in Q2. Shopping centres were up 0.1%, with retail warehouses up 0.3%.
McCombe continued: ‘We keep hearing about the international wall of capital waiting to plough back into UK real estate. However, we believe this is more of a slow release for the right opportunity and incredibly risk-averse.
“With the geopolitical landscape and inflation/interest rates right now, most investors – overseas included – are maintaining a wait and see approach and, with outflows from open-ended funds, we don’t expect that to change much over the next two quarters.”
For the next three years, Cluttons predicts retail warehousing to perform the best in terms of relative total returns up at 11% by the end of 2024, with industrials second at around 8-9% over the same period. Shopping centres were next with 7% predicted, ahead of the UK total average at 6.3%.
