Returns on prime UK commercial real estate assets are projected to reach up to 11% by 2028

Research suggests that prime office assets could potentially achieve annual total returns of up to 11% over the next five years, with the strongest returns expected in key regional markets. The BNP Paribas Real Estate UK property projections up to 2028 indicate promising prospects for robust risk-adjusted returns across major UK real estate sectors.

Forecasting predicts that prime assets in the logistics sector may deliver up to 10% in total returns per annum up to 2028 in key markets like the North West and the Midlands. Similarly, prime retail properties in and around prominent luxury shopping streets in Central London, such as New Bond Street, are expected to generate 4% per year over the same period, primarily driven by income returns.

These total return projections take into account both capital growth and income return and exhibit a varied outlook depending on location and geography, according to the firm’s analysis.

Investors seeking income returns are likely to be attracted to the regional office market, which is anticipated to achieve gains of 7% per annum, as per the research’s predictions. On the other hand, for capital growth opportunities, logistics assets in the North West and Midlands, along with offices in London’s West End and City, and Bristol, are projected to yield annual returns of 5%. Bristol, with a slightly higher rate, stands out with the strongest overall return, projecting an annual growth rate of up to 12%.

Charlie Tattersall, from BNP Paribas Real Estate UK’s capital markets research team, remarked, “With signs of falling inflation and impending base rate cuts, indications point to the onset of the next real estate cycle. However, this cycle is expected to differ significantly from the post-GFC era, where ultra-low interest rates and inexpensive debt led to substantial yield compression.”

The firm’s income return projections for the next five years indicate that prime yields present an attractive entry point for investors. Capital growth is anticipated to primarily derive from rental growth, fueled by persistent shortages in Grade A supply and strong demand for top-tier spaces across key sectors, as shared by Tattersall.

“Owners of commercial real estate should prioritize active management strategies to mitigate obsolescence risk and emphasize tenant retention to generate returns,” Tattersall added.

James Carrington, head of city investment at BNP Paribas Real Estate UK, noted, “The London market has likely reached its lowest point and is arguably the most appealing major city to invest in Europe presently, attracting capital back into the market.”

Source: Funds Europe