Invesco Real Estate (UK)Company
Opportunities across European real estate in 2010 (EU) |
Thursday 28 January 2010 According to the latest INVESCO interim European house view outlook summary for 2010, there are plenty of investment opportunities for properties all across Europe. |
From the Invesco Real Estate summary, the main highlights are as follows:
• Estimated yields in many European markets remain at levels above their long run
averages, suggesting good value to be had in European real estate.
• The UK, France and Spain still look attractively priced based on capital value per
square metre, while most other markets look close to fair pricing.
• The French occupational market looks likely to recover quickest across Europe.
• Pricing looks sensible in Spain and central Europe despite higher levels of perceived
risk (such as rental declines and market transparency).
• Forecasts show that Germany remains stable with increased opportunities to buy
good quality stock.
• Recovery signs exist in the largest, most liquid Eastern Europe markets. However,
core product remains scarce.
• As banks continue to reduce exposure to real estate, we expect there to be
more “distressed” core plus / value-added opportunities in 2010 than 2009.
Economic outlook
GDP growth across Europe is forecast to be positive but remain well below trend levels in 2010 with broad based growth not expected to return until 2011. The rebuilding of inventories is expected to provide a short-term boost to GDP but there remains much uncertainty about the unwinding of the exceptional monetary policies put in place by central banks around the world and its impact on GDP.
The liquidity created by these schemes has not yet filtered through into lending to consumers or businesses (in part due to a lack of demand), but has provided the liquidity for financial investment, resulting in strong stock market performance, ongoing low yields for government bonds, and increased investment in real estate markets. With interest rates forecast to remain low during 2010, and 10-year government bond yields forecast to rise by c.50 bps, the investment environment is set to continue to look attractive for real estate with a significant positive spread between property yields and both all-in financing costs and risk free rates.
Occupational markets
While demand will remain subdued as a consequence of ongoing weaknesses in the economy, rental declines will be on a much smaller scale and less widespread than in 2009. Unemployment is forecast to peak during 2010, and once businesses start to invest and hire in the latter part of the year we should start to see some signs of improvement in fundamentals. On prime space, rents are likely to stabilise this year across most major markets as occupiers seek to take advantage of low rents and lock in to attractive deals. However, this is likely to generate a further increase in second-hand space, and consequently rents in this segment of the market are likely to continue falling. Therefore it remains vital that asset managers pro-actively manage void risks.
Rents are likely to be most stable in the prime logistics sector, as speculative development is very limited and rents continue to be driven by build costs. Retail is likely to be the sector that sees the slowest recovery given the structural challenges that retailers face in the short-to-medium term. Office markets, traditionally the most cyclical, are likely to see the largest upswing, with some markets such as London and Paris likely to begin recovering during the course of this year. Beyond 2010, there are good prospects for rental growth as economies return to trend output. In many markets there are likely to be shortages of space given the lack of development activity over the past two years and these supply constraints will fuel the recovery.
The investment market and risks
The support provided by monetary policy has rapidly eroded risk aversion to real estate as an asset class, although activity has been focussed in a very narrow spectrum of the market. The consequent imbalance between investor demand for prime property and the supply has stabilised or even driven yields down during the second half of 2009. Pricing is currently most aggressive in the UK, where yields have hardened by as much as 150 bps since the end of 2008. Where yields have hardened significantly in H2 2009 (e.g. UK, France), we expect stabilisation in 2010 given the out-standing debt issues and continued weakness in the occupational market.
There exists the potential for over-pricing in the short term in these markets due to unrealistic underwriting assumptions regarding the outlook for rental growth and the risk of vacancy in the short-term. However, yields in most markets remain above long term averages suggesting good value is still available. Yields in many of the markets that we cover, especially in the more mature CEE markets, have stabilised earlier than expected, and at levels lower than expected. Therefore, to achieve appropriate returns going forward, there is a need for both yield hardening and some rental growth.
Outstanding real estate debt remains a big issue.
The latest De Montfort University study suggests that in the UK alone £64bn of maturing debt will require refinancing over the course of 2010/2011. Refinancing is likely to limit the number of participants in the market, both because investors will have to find additional capital for existing property holdings, and also because availability of debt from UK banks, particularly for larger lot sizes, will be limited.
INVESCO believes that a steady increase in stock availability during 2010 (particularly as banks begin a controlled reduction of their loan books), combined with broader investment opportunities elsewhere in Europe, will ease pressure on the UK market and help pricing to stabilise. Across Europe, increasing transaction volumes are expected to generate greater price transparency, which in turn should provide a more stabilised market platform from which to seek compelling real estate opportunities.
Source: INVESCO Real Estate |
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