Q1 2022 commercial property update

 

Russia’s invasion of Ukraine will have major implications for the world economy and has raised the possibility of a UK recession. Higher commodity and energy prices will weigh heavily on the UK economy. Higher inflation will erode real incomes and consumption, further reducing future GDP growth which recorded growth of just 0.1% in February. Year on year CPI inflation increased to 7.0% in March 2022 from 5.4 % in December 2021. This is the highest CPI 12-month inflation rate since March 1992. Interest rates have been increased to 1% from 0.25% at the start of the year and there are expectations of further increases during 2022 to 1.25%.

The MSCI World Index has fallen 1.7% in Q1. Major markets have all fared worse. Japan’s Nikkei Index is down 3.4%, the Eurofirst Index is down 5.7% and the NASDAQ down 9.1%. Some big tech stocks have fallen further. Meta (aka Facebook) and Netflix are down 33.9% and 37.8% respectively. And, Prologis, the largest logistic and warehouse real estate company in the world, has suffered a 4% fall in its share price despite strong performance by the sector in global real estate market.

The UK’s commercial real estate market continues to post strong performance numbers, seemingly oblivious to the risks from geo-political events, interest rate rises and the turmoil in other global financial markets. In Q1, All Property total returns, as recorded by the MSCI Monthly Index, might have decreased to 5.6% but that still reflects an annualised rate of 23.9%. In the 12-months to the end of March 2022, All Property total returns increased to 23.9% from 19.9% in the 12-months to the end of December 2021.

All Property total returns could now reach 11% or more in 2022. However, we have reduced our forecast for 2023 from 9% to 7%. The net effect of raising 2022’s forecast and easing back on the outlook for 2023 is that the annualised average forecast for the 3-years ending December 2024 remains at 8%. However, it should be noted that the latest forecasts were put together before the MPC’s latest Monetary Policy Report indicating the possibility of recession in Q4 2022 or 2023. 

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