Investment Yields Across Almost all Sectors to end 2024 at a Lower Level than 2023, Predicts Colliers

Posted by Colliers on 8th October 2024 -

Despite continued challenges from high interest rates and debt costs, yields are now stabilising in most sectors, reports Colliers, with mild compression expected in almost all sectors by the end of the year. UK investment volumes reached £12.3 billion in Q2, the strongest in nearly two years, with promising signs of stability across several sectors, reports Colliers in its latest Real Estate Investment Forecasts report.

The improved market conditions are driving positive forecasts across multiple sectors, with retail and hotel investment levels now tracking above their respective five-year quarterly averages. Yields are beginning to compress across most retail segments, led by standard shops (-17bps) and shopping centres (-15bps), while hotel investment had its strongest first half figure since 2015. 

Oliver Kolodseike, director in the Research & Economics team at Colliers, comments: “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.”

According to its latest forecasts, Colliers predicts that capital values will 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 following 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. 

On a sector by sector basis, demand for retail assets is expected to improve further this year, with pricing still looking very attractive. Retail warehouses are predicted to be the sector’s star performer over the forecast horizon. 

While investment volumes are likely to remain weak for offices in the coming months, 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. 

John Knowles, head of National Capital Markets at Colliers, adds: “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.”