ING REIM bets on retail and offices in Europe over next 3-5 years

ING Real Estate Investment Management expects the continued economic recovery in much of Northern and Western Europe to generate high single-digit returns for real estate investors over the next three to five years, particularly in the retail sector, but increasingly also in office markets.

Commenting on ING REIM’s annual Global Vision 2011 report which was released today, Tim Bellman, Global Head of Research at ING REIM, told PropertyEU: 'Within Continental Europe, we are most positive about retail and prime shopping centres in core markets. We also like the office recovery and the returns look most compelling in France although product is difficult to access there.' In the logistics sector, Germany and France offer the best prospects, Bellman said. An extremely positive sign for the European recovery is that the German consumer is finally coming into the shopping centre again and starting to spend, he noted. 'We've long awaited that moment and there now seems to be signs of that coming through.'

Within Europe, countries at the heart of the eurozone will do well, according to Bellman. ‘Low-risk countries such as Germany, France, Belgium, the Netherlands and the Nordics will see strong returns in the recovery phase, relecting stabilisation and rapid improvement of prime properties in most of these countries as investors hunt for yield, chasing up the price of commercial real estate in major cities such as London, Paris and increasingly, German cities.’

ING REIM also expects more distressed selling by banks of secondary properties in 2011, particularly in the UK. Bellman: ‘We think the rebound in prime property values is going enable the banks to address the problems of prime properties without recourse to distressed sales. But secondary properties are not rebounding in value. They are more difficult to finance and have more risks attached and it is in this area that we expect to see more sales coming through from banks. That is something we think will pick up in 2011, particularly in the UK, and it will start to rumble through the Continent in 2011 and 2012.’

The Global Vision report notes that a wide gulf has opened up between the yields/cap rates for prime properties and secondary assets in many markets - in some cases amounting to 300-400 basis points. Once property occupier markets have stabilised, it seems likely a premium of this nature might start to appear as an attractive risk-return combination to some slightly more risk accepting investors over the course of 2011.

Bellman: 'The recovery is already at different points in the cycle around the globe and we expect these differences will continue. For core or core plus investors convinced that the recovery is firmly grounded this may be a time to increase their allocation to real estate and start to consider a rebalancing of their portfolio towards the more cyclical growth sectors and markets such as hotels and offices.'

Turning to the recent uncertainty surrounding the euro, Bellman said this had had little effect on European real estate markets so far. ‘In such volatile and uncertain times for the euro and the sovereign debt markets, the income return from unlisted or direct real estate, which can be 5%, 6% or 7% per annum, starts to look an attractive alternative for investors taking the long-term view. So by and large there has been little effect so far.’ But, he said, it would be ‘foolish’ not to worry about the problems in the eurozone which seemed to rumble on from one country to the next and would probably continue to do so for awhile. ‘It’s something we need to keep a close eye on,’ he said.

Part of ING Group, ING REIM focuses on the investment management of quality real estate in all major global markets with a total portfolio of EUR 65.3 bn. The fund manager is active in Europe, North America and South America, Asia and Australia.