The research and ratings house said commercial property forecasts have suffered downward revisions for this year and through to 2020, with 2016 Investment Property Databank returns now likely to be under 8% compared to 13.1% last year.
Directly invested property funds are expected to return less than the IPD, and ‘hot money’ which moved into the sector chasing double digit returns could exit.
“The outlook for UK commercial property is no longer what it was,” said Andy Brunner, investment strategist at Morningstar. “Investors are now faced with the prospect of lower returns from the main vehicles, directly invested property funds. While likely to exceed cash, given the strong sustainable yield, performance may not compensate for the illiquidity of the asset class.
“UK commercial property capital value growth peaked in June 2014 at a monthly annualised rate of 19.1% and from a quarterly perspective in Q2 2014 at 13.3%,” Brunner continued.
“Thereafter the IPD index has gradually slowed to the extent that CVG in Q4 2015 was roughly half the peak level. The slowdown has continued into the early part of 2016 and forecasts for the full year have suffered downward revisions.”
He added that 2016 total return forecasts*are now down to 7.9% from 9.3% while minimum and maximum forecasts have declined significantly, the former to just 2.6% from 6.7%, and the latter to 10.1% from 13.0%.
Brunner also noted that UK property shares have “declined substantially over the past five months” with the two majors property companies Land Securities and British Land underperforming the FTSE All Share index by nearly 20%.