The recent 25% slump in capital values has been driven by the increased cost of capital, but the big story of this downturn is that rental growth has continued – in contrast to the steep falls of previous slowdowns. 

Limited supply has helped: tighter post-GFC regulations, Brexit, Covid, the growth of online shopping and inflation/monetary tightening have all contributed.   

The fallout from ‘Trussonomics’ meanwhile worked to prevent over-supply in the booming logistics sector, supporting rental growth.  Likewise for residential, with the acute under-supply of space generating double-digit rental increases last year. 

Even the beleaguered office sector has seen rental uplift, albeit at the very top end.  The market is responding to the glut of secondary offices, with net office space continuing to fall and an ‘over correction’ possible at some point.  

A new development boom is not imminent.  Energising the planning system is difficult, while higher costs and exit yield assumptions continue to challenge development viability.  

Demographics will continue to drive residential demand, with the population expected to soon reach 70 million.  Despite remote working, demand for amenity rich and sustainable offices is rising, while rebased retail rents mean that good locations are well-positioned for growth.  

While affordability issues may dampen rental growth in some sectors (e.g. beds), there is scope for rents to accelerate, after decades of below trend growth and efficiency gains from technology and improved sustainability.  

While the risk-free rate was the standard benchmark for property yields, there were sustained periods when strong rental growth forecasts created a ‘reverse yield gap’.  So, history shows it is possible to make solid real estate returns without ‘free’ money.  

There is now a major opportunity to invest into a re-priced market with strong rental growth prospects. As active real estate managers, we have more control over asset level rental performance than exit yield and, if we get this right, we can deliver good returns for our investors.