After a hard-hit year in 2020 in the aftermath of the coronavirus pandemic, return on investments from the commercial property in the UK has now stabilised, according to market data. The total returns growth is estimated to reach 6.4 per cent in 2021, a report prepared by commercial real estate brokerage professional services and investment management company Colliers has revealed. Composed of both rental and capital growth, this has proven attractive to investors, who have maintained faith in the sector’s longevity with new survey data from EY showing that the UK absorbed investment in 56 projects in the financial sector last year, the most in Europe.
The 2.3 per cent decline in all property returns from 2020, catalogued in the latest Real Estate Investment Forecasts report, created a strong buying opportunity for long term property investors. In the short run, a 4.8 per cent income return is expected in 2021, alongside 1.6 per cent capital growth. In the medium term, Colliers’ five year outlook suggests that whilst rents from the retail space will average -1.1 per cent per annum through to 2025, total returns from the office space are expected to average 5.1 per cent per annum over the same period.
In May, approximately £2.6 billion of investment was made into the UK commercial real estate sector, double the figure for 2020, according to the latest May Property Snapshot. Shopping centres demonstrated a remarkable revival with their second best month since the beginning of 2020. Industrial assets also proved popular with ‘all industrial’ rental growth of 3.3 per cent predicted this year, and total returns of 16.1 per cent forecast in 2021 before slowing to 5.4 per cent in 2022.
Further, pockets of growth can be found with logistics, warehousing and data centres. There is a significant agglomeration of data centres around the M25 and south east, the largest concentration in Britain. As such the technology, media, and telecom (TMT) sector accounts for nearly 33 per cent of office take-up here over the last 20 years. Slough and West London in particular are responsible for 42 per cent of data centre capacity, with greater investment leading to higher employment and increased demand for quality of both commercial space and housing in these areas.
The vaccine roll-out, improving economic and a return to the office in the second half should help the office sector to stabilise. Despite for mild-yield compression in the , from a total returns growth perspective, the South East and ‘Rest of UK’ office markets will perform better than London in 2021. Total returns are expected to increase by 3.5 per cent in the South East and 3.7 per cent in the ’Rest of UK’ this , which compares to 1.4 per cent for central London.