Offices to outperform – Jones Lang LaSalle

Offices are forecast to deliver the strongest total returns of all commercial property sectors during the 2013-2017 period according to new estimates produced by Jones Lang LaSalle.

The firm has revised up its forecast for total returns at the All Property level in its latest UK commercial property forecast to 5.8% for 2013, compared with its previous forecast (in March this year) of 4.6% for the year. All Property total returns for 2014 are currently forecast at 6.4%, rising to 7.3% in 2015 and then to 7.6% in 2016 and 7.8% in 2017 to produce an annual average over the period of 7.0%.

Jones Lang LaSalle expects offices to produce an average total return of 7.5% per year during the five-year forecast period, with Central London office space forecast to outperform other market segments.

Mark Jones, Director of Strategic Asset Management at Jones Lang LaSalle, said: “Returns will still be driven principally by the income component, with a modicum of rental growth. With property yields below their long-term averages across most markets and bond rates rising, any potential inward shift will remain limited. However, property should still produce a respectable medium term real return in the order of 5% per annum.”

The weakest performing of the three major sectors will be retail, Jones Lang LaSalle says, as overall returns for the sector are forecast to be pulled lower by the shopping centres market. The firm does, however, expect West End retail property to outperform. Meanwhile the UK industrial sector is forecast to do better thanks to higher income returns.

Andrew Burrell, Head of EMEA Forecasting at Jones Lang LaSalle, added: “Although forecasts for short-term performance across most indicators have improved slightly, the fragile upturn in the economy means that rental growth projections over the longer term are still significantly below trend. Even by the final years, rents barely keep pace with inflation.”