L&G predicts further commercial property rental growth

Rental growth rate across the commercial property sectors will almost double over the next few years compared with the rate experienced over the past five years, according to the latest Fundamentals briefing from Legal & General Property (LGP).

LGP expects rental growth to average around 3 per cent annually from 2016-2018, nearly double the rate experienced over the past five years (1.5 per cent pa), according to its latest “Fundamentals” research report.  Office and industrial sectors are predicted to see the most rapid growth; while, although there is likely to be some recovery for retail rents, it is expected that this will be relatively muted.
Rental growth is already on the up, driven by stronger tenant demand and a shrinking supply of space. Since peaking in mid-2010, the volume of available office and industrial space has fallen 28 per cent and is more pronounced for the best quality space.
Commercial property prices have risen nearly 20 per cent since the start of 2014 and market yields have fallen. According to LGP, yields are now consistent with the level they would expect once central bank interest rates have normalised and without the expectation of above average rental growth. This reduction in yields being superseded by rental growth is the main driver of commercial property capital growth.
Rob Martin, Research Director for Real Assets at LGIM, says: “Commercial property rents are rising, buoyed by stronger tenant demand and a shrinking supply of space. This is taking over from yield compression as the key source of capital growth.
“Recently, there has been a progressive improvement in the volume of space being leased by companies. While this has not permeated the whole market equally, with the retail property sector lagging on a relative basis, there has been a significant improvement in overall demand.
“While the occupier markets are in increasingly good shape, sentiment amongst a number of investors has become more measured and the market has seen a more even balance of buyers and sellers since the start of the summer.
“We view the recent moderation in transactional activity as a positive, as it reduces the potential for momentum to propel the market into overvaluation and eventual correction.”

Source: Property Funds World