Beware 2017?

The IPF’s Consensus Forecasts for the UK MSCI (IPD) index were released last week. The gap in expected performance between office and retail is pretty notable. Office rents are forecasted to grow much more than retail and, not surprisingly, capital value growth is also expected to be higher for the office sector. The fact that forecasts for rental growth are lower than capital growth for next year indicates that forecasters are expecting continuing ‘yield compression‘ in 2016. It looks like they’re also expecting a mild (let’s call it) ‘yield deompression‘ in 2017 with rental growth forecasted to be higher than capital value growth in that year. I’m not sure what is driving the expected yield change – some type of reversion to mean process? I’d be surprised if any increase in All Property yields wasn’t larger than the 0.15% or so increase implied in the Consensus Forecast. It feels like the predicted correction – albeit by the consensus – is quite smooth. Over the last 30 years, the All Property IPD index typically moved by approx. 0.3% (median) or 0.5% (average) up or down.  The average tends to be dragged up by some volatile years years (+ 1.7% in1990, -1.6% in 1993 and +2.1% in 2009). It’s also notable that there’s a lot of disagreement about the size of the yield decompression – especially among property advisors. The forecasts for All Property capital growth in 2017 among the 26 fund manager and property advisory firms range from -16% to +4%. A 16% fall in capital values would require a yield increase of around 1%. It seems to be about yields – no forecasting organisation is predicting decreases in All Property rental value growth in 2017.

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