Research from two real estate companies has predicted uninspiring returns from direct investment over the coming years, with capital returns taking a sharp dip.
Analysts at BNP Paribas Real Estate and Standard Life Investment foresee capital growth declining dramatically after 2016 as interest rate rises and an end to yield compression take their toll.
BNP Paribas Real Estate’s figures paint a lacklustre picture of UK returns for the upcoming five years, particularly beyond 2017, compared with the preceding years of the market’s recovery.
The French adviser expects capital returns in 2018 and 2019 to be negative, falling by 0.8% in both years before recovering slightly, but still reducing by -0.3%.
However, the returns from income are predicted by both research teams to help soften the blow.
BNP PRE predicts that income will rise from 4.2% per annum in 2015 steadily through to 4.7% in 2020. By Standard Life’s calculations, income growth will exceed BNP PRE’s estimates by 120 basis points in 2015 and 110 bps in 2016.
In general, Standard Life’s forecasts paint a slightly rosier picture than BNP PRE’s for the coming years, though not by a large amount. Total returns were expected to shrink from 17.9% in 2014 to 14% in 2015 driven by a 320bp drop in capital returns.
In 2016 the fund manager predicted an even greater fall in capital returns, 560bps,
pushing down total returns to 8.6% despite income rising slightly over the course of the year.
Ann Breen, head of real estate research and strategy at Standard Life, believed that total returns in 2017 and 2018 across all assets would be supported by income returns from retail as consumer demand returned to the high street.
West End offices, on the other hand, were expected to see total returns drop by nearly 2% in 2017 and then by more than 6% in 2018.
Despite such figures, the two firms remain positive for the real estate sector in the near future, with Breen describing the forecast returns not as a downturn but a “moderation” of the current market.
david.hatcher@estatesgazette.com
Source: Standard Life Investments
Source: BNP Paribas Real Estate
