Another weak year for rental growth – Jones Lang LaSalle

Jones Lang LaSalle expects UK property returns to improve to 4.6% at the All Property level in 2013, compared with 3.4% in 2012. Returns over the five-year forecast period reach 6.2%, but this is lower than the long-term average. The firm’s latest forecasts show that rental growth is expected to remain weak overall this year, apart from London office space. JLL forecasts that economic recovery will bring an upturn in rental growth from 2014, but even then it expects increases to lag behind inflation in the longer term.

Office property will produce the strongest returns over the five-year period, says Jones Lang LaSalle, at an average of 7.1% per year. Central London offices lead the way and the large gap between the performance of property in the capital and the rest of the UK is set to continue.

Industrial property returns are forecast at 6.2% for the five-year forecast, with distribution warehouses expected to produce a stronger performance than standard industrial space. The retail sector’s returns are forecast to remain weak until 2015 when a solid recovery is in prospect as the economy also gains strength: until then, returns for the sector are expected to be dragged down by the shopping centres subsector.

All Property IPD rents are set to remain broadly unchanged in 2013, with offices the only sector forecast to record rental growth this year. Retail rents, which fell last year, are forecast to remain stable in 2013; retail warehouses are expected to perform more strongly than other retail subsectors, with rental growth averaging 1.7% per year over the forecast period, but for the sector as a whole the five-year forecast average remains firmly below its long-term trend. Mark Jones, director of strategic asset management at JLL, noted that the firm’s latest forecasts “still show UK direct property delivering a real return over five years of under 5% per annum,” although he added that the strong variation in performance between Central London property and elsewhere in the UK was set to continue.