Q3 2022 Commercial property examiner update

Forecasts for the UK economy expect Inflationary pressures in the United Kingdom and the rest of Europe to intensify and exacerbate the fall in real incomes for UK households. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative. CPI inflation is now expected to rise to just over 13% in the fourth quarter of 2022, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

Interest rates have risen from 0.1% in November 2021 to 2.25% and are likely to rise further to 3.0% by the end of the year. The markets reacted badly to September’s mini-budget. The pricing of UK risk free assets collapsed in Q3 and the era of cheap money and historic low yields that had prevailed since the GFC seemed to have ended. The yield on the 5-15 year gilt index hardened by a further 197 bps in Q3 to 4.2%. This has downside consequences for the valuation of real assets and borrowing costs.

In Q3, All Property total returns, as recorded by the MSCI Monthly Index, decreased to -4.1% from +3.8% in Q2. Q3’s dramatic increase in the benchmark risk free rate and borrowing costs has led to a re-appraisal of value in all sectors of the market and in particular industrials and logistics

Year to date performance for UK commercial real estate has reached 5.2% but we expect that the market will slow further in the last quarter of the year. Accordingly, we have downgraded our forecast All Property total return for 2022 from 11% to 1% as the exceptionally strong performance experienced in Q4 last year falls out of the calculation.

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