Aviva Investors has improved its medium-term outlook for UK and global commercial real estate following last year’s central bank intervention that led to a greater risk-appetite among investors.
In the UK, Aviva Investors now forecasts an average annual return of eight per cent for the five years of 2013 to 2017. When looking at the five year period from 2012 at this time last year, the team had forecast six per cent or less.
Aviva Investors says prospects for the asset class are also improving on a global basis, with Asia Pacific offering the highest potential returns, and other attractive opportunities to be found selectively elsewhere.
David Skinner, chief investment officer of real estate at Aviva Investors, says: “We expect 2013 to be a turning point for UK real estate. Recent months have seen markets display growing conviction in central banks’ commitment to extremely loose monetary policy, with risk assets such as equities and high yield debt having rallied notably. In the UK this has made good quality real estate look relatively attractive and we believe the search for yield will drive strong returns in 2013.
“While we continue to believe that prime assets will perform well in most locations, investors are likely to be increasingly attracted to higher-yielding sectors with the focus shifting from the prime assets in London to secondary and regional markets. As a result, we think sectors such as industrials and offices outside central London will outperform on a risk-adjusted basis. The time is right, therefore, for selective secondary strategies.”
Aviva Investors also believes that the prospects for real estate are improving on a global basis:
• Returns in Asia Pacific are expected to pick up this year, driven by stronger occupier demand and growing investor interest. Most central banks in the region are likely to maintain accommodative monetary policies in line with the US and Europe. Australia, with relatively stable and high yields, looks attractive over the long-term, although weakness is possible in the near term. And even though the medium to long-term outlook in Japan is threatened by weak demographics, cyclical factors provide an opportune entry point for Tokyo offices.
• In the US, there is significant scope for the recovery to broaden and robust returns over the next five years are expected from commercial real estate. Occupier market fundamentals are improving, banks continue to ease their lending standards for commercial real estate and relative pricing remains favourable.
• Within Europe, high quality assets with secure income streams in Germany and the Nordics are preferred. Prime Irish real estate may now also provide attractive opportunities.
Skinner says: “Given that investors’ risk appetite is increasing and real estate looks relatively cheap, selective strategies in higher-yielding sectors are likely to drive performance over the next five years. Globally, we expect Asia Pacific to offer the highest returns of all global regions in the medium term but well-advised investors are likely to find attractive strategies in most major markets.
“In the UK, 2013 represents a good entry point to real estate as the market begins its turnaround. However, strategies need to be designed with an acute awareness of risks. While income risks are no longer deteriorating, they remain elevated. The retail sector, for example, is still suffering from a squeeze on household finances and structural changes resulting from the growth of online sales. Ongoing deleveraging is expected to be a further constraint on the performance of some parts of the market. So naturally, selective strategies in secondary and regional markets need to be designed with prevailing risks in mind.”