Aberdeen Property Investors expects European investment activity in 2008 to weaken by around 30%, but it also argues that there are opportunities despite the market weakness in its current European Property Snapshot.
Aberdeen Property Investors expects European investment activity in 2008 to weaken by around 30%, but it also argues that there are opportunities despite the market weakness in its current European Property Snapshot.
The report says that although highly leveraged activity will be reduced and large deals will be affected due to difficulty in raising debt capital, we can expect to see increased activity from equity investors who are likely to take advantage of a higher yield environment with fewer buyers. As a result, despite the anticipated slowdown in transaction activity, the report says there remain significant amounts of equity committed to real estate investment.
The report said that according to CBRE estimates, ‘total investment turnover in European commercial real estate reached EUR 236 bn in 2007, slightly up on the EUR 230 bn recorded in 2006. As a result of stricter lending conditions, investment activity in the final quarter of 2007 amounted to EUR 47 bn and was down one-third compared to the fourth quarter of 2006’.
However, Aberdeen says market fundamentals and active asset management will drive future performance. According to the report, future performance is going to be increasingly dependent upon the underlying fundamentals of the market rather than yield compression. Aberdeen predicts that yields will drift higher across most countries and sectors in 2008 and that property returns will be driven by rental growth. Consequently, ‘active asset management will play an increasingly important role in boosting performance at the investment level’.
The report also highlights the importance of being able to respond quickly to market opportunities. ‘Asset managers can maximize property liquidity by maintaining properties in a 'readiness for sale' condition. This will ensure that a portfolio is able to react quickly to any changes in management strategy or market movements. In the short term, spotting opportunities and being able to implement them effectively will be the difference between outperformance and median performance.’
Mike Turner, Aberdeen's head of global strategy & asset allocation, also argued that although US-related problems are clouding the outlook for European bonds and equities, market weakness will lead to opportunities.
'Within Pan-European equities, a number of areas of value are now emerging, including consumer goods and retailers. UK real estate stocks, in particular, are trading at considerable discounts to asset value, and there are selective opportunities to buy quality companies with sound asset-backing, that should perform well in the long run.'
