Decline in values to match GFC; offices fare worst

With economic activity weakening, we expect rental growth to continue trending downwards over the next year. At the same time, valuations remain stretched despite property yields continuing to rise at a steady pace. As a result, we have increased our forecast yield expansion and now expect the decline in property values to match the GFC downturn, with offices faring worst. Prime yields should stabilise in 2024, but remain elevated for several years, before moving down for industrial and, to a lesser extent, retail. By contrast, we think there is scope for office yields to edge higher again, ensuring that the recovery in office capital values is weakest across the sectors. On the other hand, stronger rent growth cements industrial capital value growth as the strongest. This outlook for values underpins sectoral performance in Europe over 2024-27. Industrial returns of around 8% p.a. lead the way, retail sits in the middle at 6.2% p.a., while office returns of 5.2% p.a. are weakest.