Total returns to turn negative in 2023, led by apartments

The sharp rise in interest rates this year has prompted a price correction, which is now coming through in valuation-based indices. Combined with the mild recession we are forecasting for 2023, this will weigh heavily on capital values over the next 18 months. We expect rent growth to slow markedly in 2023, particularly in the industrial and apartment sectors. And property yields will rise by around 50 bps from their mid-2022 troughs. This will see a peak-to-trough capital value fall of 10% at the all-property level, prompting total returns of minus 3.5% in 2023, before a recovery to 4% in 2024. Apartments will be the worst performer in the short-term, with rents falling in 2023 and a total peak-to-trough capital value fall in the low-to-mid-teens. We are forecasting that retail will be the only sector to enjoy positive total returns next year, albeit of not much more than 1%. Retail is the top performer over both a three-and-five-year horizon too, with returns of 5% p.a. and 6%-6.5% p.a. respectively. That compares favourably with all-property returns of 2.5% p.a. for 2023-25 and 4.5% p.a. for 2023-27.