The rise in interest rates and upcoming recession are leading to a rapid turnaround in commercial property performance. Rental growth is starting to ease, particularly in consumer-facing sectors such as leisure. Yields have continued to rise at a brisk pace, with the 13bps rise in September matching that seen in October. As a result capital values are now falling, with all subsectors recording a fall in values in September. Total returns are therefore coming under significant downward pressure. Indeed, the 2.3% negative monthly return in September was the worst for a single month since the Brexit vote in July 2016. Stretched valuations means yields have further to rise and a 2% peak-to-trough fall in GDP will also cut rents. Overall that will lead to a 15% peak-to-trough fall in all-property capital values.
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