Of direct relevance to UK property is the shortage of ‘safe’ assets globally. While this shortage has driven bond yields lower, it has also driven yields on prime commercial real estate assets in Central London and other gateway cities lower through direct investment given their appeal as wealth preservation assets. QE and lack of ‘safe’ assets explain why 10-year bond rates fell so low and why prime property yields are at record lows across prime markets in Europe and the UK.


Bond yield and base rate forecasts. Given these ‘enduring’ long-term factors and, especially, the necessity for a gradual, possibly a decade long liquidation of QE bond holdings, the ‘new normal’ is scheduled to arrive in the US when bond yields peak at 3.5% in 2022, in the UK when bond yields peak at 4% in 2023 and in the Eurozone only by 2030 when bond yields peak


at 3.8%. Given the ‘enduring factors’, bond yields will rise more slowly than general economic conditions might otherwise seem to warrant. Furthermore, the risks to the forecasts are to the downside.


Base rates follow a similar pattern as bonds and, like bonds, will peak at lower levels than previously. But, like bonds, the UK in particular will peak at a higher level (+50 bps) than both the Eurozone and the US, reflecting stronger anticipated economic growth over the forecast horizon.


For global property, the relatively benign environment suggests that any softening in pricing and outward yield shift will be gradual and more modest. Lower volatility looks increasingly like the long-term norm for property pricing.


PEAK TEN-YEAR BOND YIELDS (NOMINAL) Forecast peak


0% 1% 2% 3% 4% 5% 6%


Average 01- 07 2022


Downside 2023 QE phase 2030 US UK


Source: Oxford Economics (February 2018, October 2016), Colliers International


EZ (DE)


0% 1% 2% 3% 4% 5% 6%


BASE RATES FORECASTS


Average 01- 07 Forecast peak 2020


Downside 2024 QE phase 2027


US


UK


EZ (DE)


Source: Oxford Economics base data (Feb 18 & Oct 16) as extrapolated by Colliers International


When will the tide turn on commercial property? MIPIM 2018 | Colliers International


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4.5% 2.5%


3.5% 2.3%


4.7%


2.3% 4.0%


3.0% 4.2%


0.5%3.0% 3.0%


1.7%


1.8% 0.3%


3.0% 2.8%


4.6% 0.5% 3.3% 2.4% 2.9% 0.1% 2.8% 1.6%


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