Commercial property examiner Q3 2023

After revisions to GDP, the UK economy is now estimated to be 2.1% above its prepandemic level but remains 3.4% below its potential level.

High interest rates will continue to limit any growth in consumer expenditure and will inhibit business investment. Recession remains a possibility, and if not, a further period of below trend economic activity is likely.

MSCI’s All Property total returns decreased to -0.2% in Q3 from 1.0% in Q2 as capital values fell by -0.7%. In the 12 months to the end of September. All Property total returns edged up to -13.6% from -16.9% in the year to June as weaker numbers from Q3 2022 fell out of the calculation.

An element of recessionary fear is now starting to creep back into markets. After growing by 17.3% in H1, the MSCI World Index, with large and mid-cap representation across 23 developed markets, lost 2.7% in Q3 and all bar one of the world’s major equity markets also posted losses in Q3. The pricing of UK risk-free assets is once again under pressure and the yield premium for holding risky property assets in the UK has been squeezed down.

After a strong start to 2023, expectations of a return to weaker market conditions in the second half look to be justified, as inflation remains stubbornly high, and the path of interest rates continues upwards. Consequently, our forecast All Property total return for 2023 remains at -6.0%. The prospects of an immediate improvement in All Property returns in 2024 continues to be limited. It is likely that any stronger recovery will be delayed until 2025 or 2026. The net effect is that the annualised average forecast for the three years to the end of December 2025 could be just 2.0%.

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