Rising prices and lower yields for prime real estate in the euro-zone, fuelled in particular by retail investor buying, have pushed the sector into bubble territory, Fidelity has warned.
Citing its own analysis of the property market, the asset manager said a new group of investors had started buying into European prime real estate, including life insurance companies and retail funds.
Adrian Benedict, real estate investment director at Fidelity International, said: “We are concerned by conditions at the prime end of the real estate market which could presage trouble ahead.”
While prime commercial real estate in the euro-zone had for many years been seen as more stable than other major centres in the US and UK, it was now being bought by new investors not completely familiar with the way the asset class worked, Benedict said.
“Their demands for liquidity could easily collide with a reality of forced sales and collapsing returns, or even investor lock-ins, when the market turns,” Benedict said.
Several UK property funds were forced to temporarily halt investor withdrawals last year after a wave of requests threatened to force fire sales, in the wake of the UK’s vote to leave the EU.
However, Benedict said the European market had not yet reached this level, and – unlike previous cycles – new investments were not leveraged, he said.
“But we are increasingly cautious; it has all the hallmarks of a bubble which buyers enter at their own risk,” he added.
New investors into property were entering the market in the search of higher yields compared to bonds, whose yields remain depressed, Fidelity said. With a lower cost of capital than large international investors already in the market, they were able to pay higher prices for property and accept considerably lower yields, it said.
“However, having only experienced decades of relatively safe products with attractive, tax-free, guaranteed yields from liquid investments, this group is less aware of the risks of real estate investments,” the firm said.
The demand for high-quality, prime-grade property had already compressed yields on the assets to below 4%, according to Fidelity. It predicted that, as more and more investors bought into property funds focused mainly on holding prime assets, the resulting higher prices and lower yields would be pushed to unsustainable levels that no longer compensated for the capital risk involved.
“We would urge investors to ensure you are not over-exposed to prime property, and to seek out non-prime investment within the euro-zone or elsewhere which can still command a sustainable yield,” Benedict said.
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