Investors should look to opportunities in recovering office markets in 2005, say real estate experts. Scottish Widows Investment Partnership (SWIP) said its latest research of the e4.7trn European real estate market showed that the top countries investors should look to over the next five years were France, Netherlands, Spain and Belgium, and Finland.
The asset manager said it expects an average return of around 8.5% annually from European equities over the next four years, but that real estate will outperform with average returns of 8.7% annually over the same period. However, the asset manager believes real estate will underperform equities next year: 9.4%, compared with 12%.
Ian Hally head of property research at SWIP , said: “In the short term, the prospects for European real estate lie somewhere between those of equities and bonds. Returns, while remaining competitive, will probably not match those of equities in the next year or so.”
SWIP said Paris had emerged as one of the most attractive cities in Europe for institutional investors seeking income and capital appreciation. It believes the retail and warehousing sectors in and around Paris offer solid short- to medium-term opportunities for pension funds, with longer term growth coming from retail markets in Spain, and a potential recovery from the office market in Amsterdam.
In terms of a regional bias, SWIP has recommended property investors consider an overweight position in France and an underweight position in Germany. In terms of sectors, SWIP recommends overweight positions in the retail and warehousing sectors, while remaining underweight in the office sectors. However, in the longer term SWIP would also investigate emerging markets in central Europe and Finland.
Dr Robin Goodchild, at LaSalle Investment Management, said: “The theme for the year is that investors have got to take advantage of the office market recovery. There’s been quite a lot of pain
out there in many markets, but there is a recovery on the way.
“We have seen recovery start in London’s West End and that will spread to other markets – the City and M25. Stockholm, Madrid, Barcelona and Paris also look strong recovery prospects.”
Goodchild said that, while German occupational markets would not recover in 2005, a price correction could reduce prices to a level which would attract interest among international investors.
He said the investor appetite for real estate would hold up, because real estate had performed so well in comparison with other asset classes.
Global real estate equity analysts at UBS said: “We believe the economic environment will continue to see modest retail rental growth and a slow recovery in some less oversupplied office markets (Paris and London’s West End). This outlook, together with an increasing appetite for the asset class, should see further small yield shifts. 2004 saw some bottoming out of UK and European office markets and UBS commented: “Investment demand continues to be strong even in the face of weak fundamentals as the cost of borrowing, poor equity returns and lack of product are leading to strong increases in valuation.”
UBS said that, in France, retail supply could increase with government initiatives to lighten supply constraints on new store openings. And with the creation of a special body to sell buildings that will be vacated by the government interest is growing from pension funds and domestic and foreign investors.
Spanish office markets look vulnerable after a year of public bodies boosting take up, while strong retail supply could hit capital growth prospects in that sector.
The problems in the German market - especially those related to the embattled open-ended funds - mean that a REIT structure looks ever more likely.