As the search for yield becomes ever more desperate, there's a growing risk that real estate investors will allocate more capital to development which could, as a result, lead to the creation of the next real estate bubble, Thomas Wels, global head of real estate at UBS Asset Management, has warned in an interview with PropertyEU.
'Some developers promise returns of 10-15% on developments, but there is often a gap between the promised and realised return. I don't see a bubble yet, but I think there’s a risk that the underwriting could get out of control. Investors are quite desperate to reach a certain return hurdle.’
Wels sees the greatest risks generally in speculative offices and high-end residential. 'Residential in particular is a segment where developers think they know better what is needed. I’m most concerned about the mismatch between supply and demand in the high-end residential segment in gateway cities globally.'
Pension funds, insurers and sovereign wealth funds are sitting on lots of money, Wels pointed out. ‘There will be a structural change. In the next three to four years, institutional investors will find there are very few other alternatives if government bond yields don’t go up.’ One segment that Wels is not concerned about is the private rental sector (PRS) in Switzerland.
'The Swiss residential market has been perceived as overpriced for the past 25 years, but there is so much legislation to prevent a new bubble. Moreover the vacancy rate in the Swiss PRS is less than 1.5%.’ Historically, the Swiss residential sector is dominated by PRS which in turn is controlled by local life insurance companies and pension funds, Wels explained.
'The share of private ownership is massively lower than in the US and UK despite the fact that the ability to own your own home has also increased in the past few years due to record low interest rates. On the other hand, oversupply is being curbed by the stringent requirements of local mortgage banks. As a result, many Swiss citizens are being pushed into the rental sector.'
The full interview appears in the November edition of PropertyEU Magazine.
