The long view of property.
In light of the latest review of the long-term economic and financial market outlook, Capital Economics recently revisited our views for commercial property performance over the next few decades. Given the shake-up the industry has received since the advent of Covid and fears about the impact of structural change, there were good reasons for trepidation. But we found the changes to our pre-virus view were surprisingly modest. Most important, though we think that average returns will be lower than in the recent past, property will remain attractive relative to other financial assets.
We recently launched a new long-term forecasting service, The Long Run, which extends our economic and markets views through to the middle of the current century. As part of this work, we updated our long-term predictions for commercial property beyond the current decade and up to 2050.
Risky assets like equities and real estate (proxied by REITs) will continue to do well over the next 10 years
Our long-run asset allocation analysis compares the performance of a range of financial investments, including property. The broad view there is that, despite returns being lower than in the 2010s, risky assets like equities and real estate (proxied by REITs) will continue to do well over the next 10 years.
Admittedly, there are concerns about current stock market valuations, but relative to bonds these seem sustainable. Similarly, for property, while yields in some sectors are still near to historic lows, we think the asset class will offer decent returns relative to bonds – at about 6% pa on average globally – given the drift upward in inflation and interest rates that is expected over the next decade or more (see chart below).