Despite the expectation that bond yield normalisation will push out prime property yields in the next five years, confirming the current late cycle stage of the European real estate market, more than half of the markets assessed for AEW's 2019 European market outlook paper remain attractive for real estate investment, the investor has said.
The paper outlines that the global economic recovery is expected to continue despite increasing trade frictions and political complications, albeit at slower rate. In the Eurozone, a slowdown in GDP growth for the next five years is provided for, while a pick-up in growth is expected for the UK, assuming a successful Brexit treaty negotiation.
The result of this continued macro-economic recovery is that central banks are being pushed to increase base rates and reverse quantitative easing policies.
'Most of our clients accept that the European real estate markets are entering into a late cycle stage, after taking advantage of the favourable conditions over the last 5-10 years,' said Rob Wilkinson, CEO of AEW in Europe.
'Our outlook provides a realistic and relevant perspective for investors as they set their strategy going forward. With yields moving out, it is clear that more careful stock selection is needed. Combined with an intimate on-the-ground knowledge of specific markets, value can still very much be found.'
In the research paper, AEW applied a risk-adjusted return approach that compares the expected and required rate of returns of 90 markets across the main real estate sectors and European geographies.
Offices on top
Offices emerged as the most attractive European property sector, with the expected return in 23 of 37 markets exceeding the required rate of return. Consistent with market consensus retail is considered the most challenging and least attractive segment, with 17 of 33 markets scoring in the unattractive bracket. 12 of 20 logistics came in neutral or as attractive, ahead of retail but behind offices.
'Our risk-adjusted return approach allows us to present consistent results for individual and groups of markets over time,' said Hans Vrensen, head of research & strategy at AEW in Europe.
'It also enables us to confirm what most market participants already accept: that we are now in the late part of the cycle. However, there is a positive message for investors dealing with the late cycle, as actual deal data on initial yields over the last 12 months shows a wide range of variation. This confirms that investors can still meet this challenge by disciplined stock selection.'
