Yields have continued to surprise on the upside, with the all-property equivalent yield rising by 106bps in the three months to December. That matches the worst months of the GFC, and even though rental growth has held up capital values ended the year down 14.2% y/y. As the economy enters a recession this year rental growth will come under pressure, with all-property rents set for a 1% y/y decline. Offices look particularly vulnerable as workforces are cut and firms look to make cost savings from the shift to working from home. But with market interest rates now falling we still think the peak-to-trough fall in capital values will be 20%, and with more of the correction happening last year capital value falls will be more modest in 2023. That implies all-property total returns may turn positive this year.
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