Selection of cities and buildings crucial to income returns in global real estate market
Despite a recent slowing in the volume of real estate transactions, there are some bright spots for investment in cities in the US, Asia Pacific and key gateway cities in Europe, according to a report by Invesco.
The H2 2012 Real Estate House View suggests that the most favourable outlook for real estate in the coming year is in the US and Australia.
While performance will vary region to region, many US cities have recently performed well and are expected to continue to deliver strong returns in 2013-2015.
Beyond this, growth cities in the Asia Pacific region and European gateway cities are also expected to continue to outperform in their individual regions and, in turn, account for a large proportion of real estate transaction volumes.
Timothy Bellman, head of global research, Invesco Real Estate, says: “Globally, investors might consider the key gateway cities in each region with the strongest growth prospects as, on the whole, these are likely to outperform both national economies and smaller cities. In these locations, with limited product available, some investors may wish also to consider value-add and development strategies to create core real estate in gateway cities. Other investors may wish to consider the very best assets in second tier markets.”
In respect to the outlook in Europe he says: “Despite headwinds from the economic and financial situation, in Europe cities such as London, Paris, Munich and Stockholm have been identified as returning a strong performance in real estate. There are many real estate sectors to consider but large international tourist hotel brands in major European cities should continue to offer attractive income returns as they continue to benefit from wealthy visitors from the emerging markets.”
The office market is expected to deliver stronger total returns compared to other sectors in many cities in the Asia Pacific region and the US. In Europe, supply constrained gateway office markets are expected to deliver the best short-term returns and are likely to see the earliest recovery in occupier demand, which will drive rental growth. The office sector is traditionally more cyclical than other sectors and global investors are now starting to look towards cyclical opportunities in some gateway cities.
Globally, the retail sector is expected to be strongest in dominant parks, shopping centres and destination high streets where there is a luxury brand presence setting a higher rent level. Peripheral or discount locations for retail are likely to be weaker. In Europe, for example, the logistics sector is anticipated to pick up due to the growth of internet shopping and, over time, some of the growth in the demand for logistics space may be at the expense of demand in the retail sector.
The report shows that the lending environment remains constrained in many markets, particularly in Europe where financing has continued to grow tighter during 2012. Globally, debt is available for creditworthy borrowers for core investment in prime properties, however, it is much harder to secure for assets with any kind of risk attached, such as location, quality or security of income.
Transaction volume in the real estate market has eased more recently. In the European market transactions fell by 28 per cent overall, but London and Paris bucked this trend, remaining among the most active markets worldwide, with transactions in the Americas slowing by 21 per cent. Over the past five years the volume of transactions in the Asia Pacific region has been stronger than in other regions but this is now slowing.
Bellman says: “The recent reduction in the volume of transactions is due to a number of global factors including the slowing of development activity in China, uncertainty in the Eurozone and a shortage of prime buildings for sale everywhere. Debt has been available at times to fund construction in a few bright spots. This trend has been seen in the US, where transactions have rebounded since 2010 largely due to strong demand in the apartment sector, which has resulted in developers bringing forward the construction of new apartment projects in cities with the greatest demand.
“Despite some difficulties related to the lending environment and continued political and economic uncertainly we expect prime real estate to continue to be attractive, delivering strong and stable income returns in a number of sectors. Understanding the local market economic drivers remains vital to delivering a strong performance. Those investing globally may wish tactically to favour gateway cities, especially those in the US and developed Asia. Overall, we believe real estate continues to play a role as part of a multi-asset portfolio.”