This means keeping a long-term focus on market fundamentals and the location of assets in order to achieve good returns and limit the risks associated with any potential instability. “A key lesson from 2016 for investors is that public opinion is not predictable, and that political risks should be closely monitored,” explains Dr Marcus Cieleback, Group Head of Research at PATRIZIA Immobilien AG.
Applying this long-term view to different sectors within commercial real estate, analysing their trends and looking for the stories behind the numbers makes it apparent why an investor would need this farsighted expertise in order to achieve above average returns.
For example, in the European retail sector it would appear that while prime yields are falling and converging (2016: 3-4.2%; 2012: 4.0-5.6%), prime rents are in fact growing and diverging (2016: 1.8-5.8%; 2014: 3.4-6.1%. This is because while a large number of markets are showing accelerated growth above the EU average, heavy polarisation is taking place within the sector, leading to an increasing number of markets underperforming. The dominant high street locations will still experience strong demand from consumers while the popularity of tertiary retail destinations continues to decline as online retailing continues to grow.
This is also true of the office and logistics sectors. Rents and vacancy rates in the current office cycle currently offer only limited rental growth of 2-4%, but there is still value and outperformance to be delivered through investing in undermanaged assets or in supply constrained markets. Equally, the report shows that in the logistics sector there is potential for stable rental growth in the European countries that are lagging behind the core markets in terms of the progression of the sector, while those more progressed markets still offer high, albeit volatile, rental growth environments.
The Insight report also highlights that, from a long-term perspective, real estate investments in Europe are in a regional comparison growing relatively more attractive, offering a lower downside potential. This is because in the future we are facing a lower growth environment, resulting in lower capital growth and ultimately lower total returns. From this perspective, Europe with its low volatility and low average capital growth will be the region in which future returns will be closer to past performance, especially when compared with North America and the UK. Based on such a strategic long-term allocation for Europe, investors need to select investment locations and sectors based on tactical considerations when building their portfolio.
Cieleback concludes: “Whilst we and any investor should remain mindful of the ongoing uncertainty in the wider market, we remain confident that combining a long-term strategy with the specific nuanced details of an asset, sub-sector and local market can still lead to above average returns. On this basis, and considering demographics, growth perspectives, the equilibrium interest rate and the risk preferences of the investors, Europe is still an attractive investment opportunity on the global stage.”
Please find the entire study here.
PATRIZIA Immobilien AG:
PATRIZIA Immobilien AG has been active as an investment manager on the real estate market in 15 European countries for more than 30 years. PATRIZIA’s range includes the acquisition, management, repositioning and sale of residential and commercial real estate over own licensed investment platforms. As one of the leading real estate investment companies in Europe, PATRIZIA operates as a respected business partner of large institutional clients and retail clients in all major European countries. Currently, the Company manages real estate assets worth almost EUR 19 billion, primarily as a portfolio manager and co-investor for insurance companies, pension fund institutions, sovereign funds, savings and cooperative banks. For further information, please visit: www.patrizia.ag