UK Commercial Real Estate Assets Set to Reach 11% Returns by 2028

Projections by BNP Paribas Real Estate UK show prime commercial assets in the UK poised to achieve up to 11% returns by 2028.

Prime office assets are projected to achieve annual total returns of up to 11% over the next five years, with key regional markets expected to experience the strongest returns, as per recent research conducted by BNP Paribas Real Estate UK. The property projections for the UK real estate market up to 2028 highlight the potential for robust risk-adjusted returns across various sectors. In particular, prime assets in the logistics sector are forecasted to deliver up to 10% in total returns per annum up to 2028 in key markets like the North West and the Midlands.

On the other hand, prime retail properties situated in and around prominent luxury shopping streets in Central London, such as New Bond Street, are anticipated to see a 4% annual increase over the same period, driven primarily by income returns. The calculations for total returns take into account both capital growth and income return, with variations observed based on location and geography.

Investors seeking income returns are likely to be attracted to the regional office market, which is expected to yield gains of 7% per annum, according to the research findings. For those looking for capital growth opportunities, logistics assets in the North West and Midlands, as well as offices in London's West End and City, and Bristol, are projected to offer annual returns of 5%. Notably, Bristol stands out with the strongest overall rate of return, with an annual growth rate potentially reaching up to 12%.

With inflation on the decline and the possibility of base rate cuts on the horizon, indications suggest that we are entering the next phase of the real estate cycle. However, this upcoming cycle is expected to differ significantly from the post-GFC era, characterized by ultra-low interest rates and cheap debt that led to significant yield compression.

The income return projections for the next five years suggest that prime yields present an attractive entry point for investors. Capital growth is likely to be driven by rental growth, fueled by persistent Grade A supply shortages and strong demand for top-tier spaces across key sectors. Commercial real estate owners are advised to focus on active management strategies that mitigate obsolescence risk and prioritize tenant retention to maximize returns.

The London market, having likely reached its bottom, is currently one of the most appealing major cities for real estate investment in Europe, attracting capital inflows as a result.