The economic backdrop has deteriorated, with the euro-zone set to enter recession this year, while inflation has continued to beat expectations. This will weigh on property demand across all sectors, especially retail, for which we have revised down the rental outlook given the greater expected hit to consumer spending. Although we think bond yields are close to their peaks, we expect a cumulative rise in all-property yields of 35bps over the next 12-18 months. At the all-property level, this will result in capital value falls in 2022 and 2023 and total returns of just 3.5% p.a. over the 2022-26 period. Industrial is expected to be the best performer given the recent strength of rental growth, though the sector’s lead will reduce sharply after this year. However, the risks to the property outlook are firmly to the downside given concerns that the ECB may need to do more to get inflation back to target, which will put more upward pressure on bond and property yields.
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