Aviva Investors has raised its 2014 and 2018 UK commercial real estate annual average total return forecast from 6.5% to 8.9%.
The firm’s global research manager, Chris Urwin, said the hike came as factors influencing the near-term outlook for the asset class have strengthened.
He said: “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.”He added that after 2015 Aviva continues to expect a slowdown as result of rising government bond yields.
The firm expects the biggest impact to be felt in prime markets, such as central London, which have historically been correlated with gilt yields.
Nonetheless, Aviva does 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, Aviva said.
“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,” Urwin added.
Looking at the secondary and regional office market, the firm concluded that while these sectors remain attractive, the window of opportunity is closing.
Aviva said market sentiment has already been strong and transaction pricing is frequently well ahead of valuations, which means time may be running out for investors to gain from the cyclical opportunity.
Finally, Urwin said that inflows to UK commercial real estate are projected to stay srtong buoyed by UK institutional and overseas investors.
“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.”
bridget.o’connell@estatesgazette.com
