After a 'mixed year' for real estate markets, weighed down by economic uncertainty and unforeseen political events, there are good reasons to look at 2017 with some optimism, according to PGIM Real Estate’s Outlook for the year that has just started.
Uncertainty is still high but the economic backdrop is broadly supportive and sentiment is positive, the report says: ‘When we look ahead to the next 12 months and beyond, capital flows towards major core markets look set to remain elevated, but we anticipate a greater focus on income growth, which points to value-add strategies, alternative real estate assets and emerging markets all gaining in popularity.’
PGIM highlights nine major trends that will influence market conditions and investment performance in 2017. The first is that there will be more election-related uncertainty, with crucial votes coming up in the Netherlands, France, Norway and Germany. However, ‘there is no reason to be unduly concerned about the glut of voting’, as history shows that the negative impact on occupier activity in the office sector countries concerned usually fades quickly. After all, the report states, ‘one lesson from 2016 is that markets are capable of taking unexpected results in their stride’.
Occupiers
The second trend is that key office and retail occupiers are likely to remain cautious, limiting the expansion of demand, so an acceleration in the near-term is unlikely, while the logistics sector will continue to outperform. The third trend is that lenders will be cautious about development projects, as debt constraints hold back development but low supply growth supports the rental outlook. The fourth trend is that investors will continue to target major established markets, which will receive the lion’s share of available capital.
The fifth trend is that after a slowdown in 2016 cross-border activity will increase again in the year ahead. ‘Looking ahead to next year, we expect the pattern of slower crossborder flows to reverse. Paradoxically, the emergence of so-called “de-globalization” – as some key policymakers move towards increased protectionism to reflect shifting political preferences – implies greater opportunities for investors willing to look beyond domestic markets.’
The sixth trend is that pricing momentum is slowing, as the pace of yield shift is slowing because of concerns about elevated pricing. The scope for further compression is limited in major markets that already have very low yields. ‘Europe reported the most significant yield shift, less driven by core markets where yields are very low, but rather by rising appetite for late-recovery peripheral markets such as Milan and Madrid, which now offer a fast-improving economic outlook.’
Income growth
The seventh trend is a focus on income growth. Forecasts for rising bond yields point towards higher required returns for real estate, so investors will be increasingly on the lookout for income growth. ‘As a result, we expect investors to broaden their focus beyond secure income and we anticipate growing interest in value-add strategies in developed markets that seek to improve property income streams via active asset management or repositioning strategies.’
The eighth trend is a growing interest in alternative sectors, such as self-storage, data centres and senior housing, as investors look to tap into long-term growth potential arising from favourable structural trends relating to technology and demographics. The ninth and final trend is a renewed interest in emerging markets, driven by the expectation of an increasing gap with GDP growth in developed markets.
PGIM Real Estate, part of the asset management business of Prudential Financial, is a global real estate investment firm with $66.9 bn (€64 bn) in assets under management.
