US/UK - Return expectations for opportunistic real estate strategies targeting the UK and US may be too high, experts have warned.
Institutional capital has been raised by a number of opportunistic real estate fund managers on the promise of double digit returns from investing in highly discounted or distressed opportunities in both countries.
But Real Capital Analytics has warned that both the UK and US markets still have issues to resolve - such as lack of financing, low prospects for rent and occupancy growth - and that focusing on discounts to peak values, rather than future risks, could lead to disappointment.
"A great deal of opportunistic capital is being accumulated in the hopes of achieving outsized returns in the US and UK property markets," said RCA in a new Global Currents report.
"The huge price discounts available may seem enticing, but no matter how cheap an investment may appear, if prices don't rise, investors don't gain.
"With the US and UK economies still shedding jobs and with no solution to the debt problem in sight, it could be a long time before property prices head north again."
Spreads between property yields and risk-free rates have started to settle and they are highest in the UK and North America.
Spreads in Hong Kong, for example, have compressed significantly since the end of 2008, indicating that the Hong Kong market is a much safer bet for price appreciation than the UK or US, RCA concluded.
Meanwhile, finance and real estate experts from CB Richard Ellis have also questioned the wisdom of seeking double digit returns from UK real estate in the coming years.
Robin Hubbard, executive director at CBRE Finance, said prime assets in the UK, where yields are now seeing downward pressure, will not generate the sufficient internal rates of return for many opportunistic investors.
Non-prime assets were unlikely to provide double digit return opportunities either, given that the secondary market was expected to suffer further given the lack of financing and dire occupational outlook.
Nick Axford, EMEA head of research and consulting at CBRE, said there were a lot of fund managers looking to buy non-prime assets, in many cases to actively manage them and add value, and they would have difficulty pricing them in the current market.
He said scores of properties across the UK were "messy" properties, often near the end of tenant leases, in secondary locations or of poor quality, and pricing such assets depended on the medium-term outlook, which was not clear.
"Some of the return expectations out there will have to come down," he said.