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BNP Paribas predicts commercial property will deliver double digit returns within 2 years7th February 2013

According to BNP Paribas Real Estate, the UK will benefit from the upturn in the global economy after 2013 and will see net trade improve. Beyond 2013 the economy will strengthen further, with growth averaging above 2% in 2014-16.

The leading international real estate adviser was speaking at its inaugural Capitalise event for investors, in which BNP Paribas’ global head of market economics, Paul Mortimer-Lee, also shared his economic outlook for global and local economies.

During the event, BNP Paribas Real Estate’s head of research Claire Higgins, explained that 2013 will be the year speculative development returns to the UK’s core markets, investment will increase in the regions and more sovereign wealth funds partner with local investors.

The UK property market is now on an uphill track following a relatively poor 2012, and by 2015 will be delivering double digit returns. The annual average return is expected to be just over 8 per cent over the next five years, dragged down slightly by a slower start in 2013 and a tail off in activity in 2017.

Speaking further about the market, Higgins said: “As the underlying economy and accompanying sentiment improves, so will returns. By 2015, when the economy reaches above trend growth, commercial property total returns will rise to above 10 per cent. Retail warehouses and shopping centres will be key drivers in that year.

“As consumer expenditure rebounds, well-priced retail product with asset management potential will be increasingly attractive to investors. However, this is dependent on the issue of constricted financing being eased by 2015. The industrial sector will also see a steady performance throughout the next five years, producing double digit returns in 2015 but in large part due to high income returns.”

In fact, top quality retail is set to be the star performer over the next five years, marginally ahead of Central London offices. The outlook for high street retail however, remains muted, peaking at 8 per cent in 2016. Distribution warehouses will see strong returns over the medium term and will outperform standard industrials.

Central London offices will continue to deliver healthy returns with the West End marginally outperforming the City. Regional offices will see reasonable performance, but driven by high income returns rather than capital or rental growth. Overall, this year is expected to produce an outturn of 6.0 per cent, with returns peaking in 2015.

London will continue to lead the way in the residential sector with 8.3 per cent pa growth compared to the UK average of 5.9 per cent pa but its dominance over the rest of the country will reduce.

BNP Paribas Real Estate’s head of investment Paul Abrey said: “We expect the search for long income to continue this year with London offices still attractive to overseas investors - albeit they will no longer be the only focus. We see continued global investment into residential as a key feature of 2013, while investors will also favour prime retail opportunities and investment product within the M25, well let to strong covenants.

“We also expect more speculative development in core markets this year, more asset management activity to increase returns, and for sovereign wealth funds to increasingly partner with local property investors. Finally, there is good news outside of London, as we expect further investment in the regions in 2013.”

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