Q1 2023 commercial property examiner


Forecasts for the UK economy signal that GDP will fall slightly throughout 2023 and into Q1 2024, as high energy prices and interest rates restrict consumer spending. However, this is a much shallower profile for the decline in output than forecast 3 months ago. CPI inflation is projected to fall sharply to just under 4% by the end of 2023. Continued weakness in the economy alongside a continuing reduction in energy price inflation will reduce domestic inflationary pressures and inflation will decline to below the 2% target in the medium term.

In Q4 2022, all Property total returns, as recorded by the MSCI Monthly Index, decreased to -14.5% from -4.1% in Q3. Capital growth was -15.6% in Q4 compared to -5.1% in Q3. In the 12 months to the end of December 2022, All Property total returns decreased sharply to -10.1% from+13.5% in the 12 months ending September.

Following its February meeting, the Monetary Policy Committee (MPC) has announced a further rise in base rate of 4.0%. But the yield on the 5-15 year gilt index has hardened from 3.74% at the end of December to 3.17% as the money markets clearly believe that the long term trajectory for inflation and interest rates is now downward.

We expect the weak market conditions to persist for the first half of 2023 and have therefore downgraded our forecast. All Property total return for 2023 from 4% to -6%, with only income, returns providing any solace. We expect All Property total returns will improve in 2024 to nearer 7%. The net effect is that the annualised average forecast for the 3 years ending December 2025 will be around 3%.

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