Real estate investors will have to take on more risk to secure only marginally higher returns, according to Investment Strategy Annual, a survey of global real estate markets by LaSalle Investment Management.
But the report believes that European office and retail space will continue to perform well for at least the next two years.
Rising interest rates and an incipient global slowdown top the list of real estate investors’ concerns but Robin Goodchild, head of European strategy
at LaSalle and one of the report’s authors, believes these concerns are misplaced.
“The good times will go on for a while yet,” said Mr Goodchild, although he noted that there was a medium-term risk that the weight of money in the market would go into new development.
He believes steady performance will also come from retail, especially in Germany, where consumer confidence is likely to buoy up rental growth.
“The retail sector has been producing steady returns for a long time and it will continue to do so,” said Mr Goodchild.
In contrast, warehouses, which have performed well in recent years, are now showing limited growth prospects. “Returns to date have been driven by yield compression, which won’t last, and rent growth will be poor,” he said.
In Europe, Eurozone and Nordic markets will continue to perform well and Germany’s export-fuelled emergence out of protracted economic misery will have positive reverberations in such markets as the Netherlands and France.
The office sector – especially in France, which has the continent’s lowest vacancy rates, and the UK – looks most promising. The LaSalle report’s authors advise investors to target early beneficiaries of a rental recovery – notably Stockholm, Madrid, Barcelona and Paris.
They base their optimistic predictions for the sub-sector on increasing demand combined with a decline in the development of new office space.
The LaSalle prognosis for non-European global markets is mixed.
In Asian markets, the report says that regional economic integration and overall economic growth provide a positive backdrop for opportunistic investors as long as they are prepared to take on higher levels of risk in markets where local capital is less active.
In US property, LaSalle believes student housing offers an attractive higher-risk opportunity, with core opportunities in high-cost suburban markets and industrial properties in port markets.