Searching for value
The high level of inflation will not disappear anytime soon
We have seen significantly high levels of inflation across European countries in recent months. While the factors driving these may abate in the medium term, the resultant wage pressures and production cost increases will keep inflation elevated and above the 2% target into early 2023.
Real estate remains attractive relative to other asset classes
The very high double-digit returns seen in equity and bond markets over the past two years has dwarfed the single digit and in some cases negative returns seen in real estate (excluding logistics). We think going forward the tables will turn with direct real estate outperforming, even if returns will remain in single digits.
The office sector is on the road to recovery with core or ESG compliant assets centre stage
The European office market is on its way to recover in terms of both occupation and investment. We accept there will be some permeant reduction, but this will be limited. In addition, changes in work patterns and the regulatory environment means performance will be bias towards Core and ESG compliant assets.
It has had a good run and now investors need to be strategic in the logistics space
The near term outlook remains robust with 2022 likely to be the last year of double-digit returns in most markets. With yields this low investors need to be cautious of the long-term value trap. For income driven investors, good future rental growth provides comfort; but for value investors lower.
Nominal bunds turn positive, but real yields remain deep in negative territory
Rising inflation and short-term policy rates means sovereign bond yields are rising globally. The 10yr German bunds turned positive, for the first time in three years, at the beginning of 2022. Nonetheless, real bond yields, a benchmark for real estate yields, remain deeply negative and we expect them.
We see 2022 as the last year of double digit returns; and to outperforming over the forecast period
The UK has underperformed in most sectors, except logistics, over the past five years driven by e-commerce penetration and uncertainty around Brexit. With most of these issues now behind us, the market has a structural high yield relative to continental Europe and presents good opportunity for higher returns.
After the storm, comes calm in the retail sector
We see the UK ahead of continental Europe in its peak to trough journey and therefore likely to recover earlier.
Within the sector, retail warehouse stands out for resilience, but it is important we do not ignore good core high street locations that could benefit from strong spending from the COVID-19 hoard. Returns will remain low single digits.
Superior risk-adjusted returns, but mind the regulatory gap in residential
Low supply and regulatory squeeze presents major challenges for investors. However, for most investors, it remains one of the most desirable real estate asset classes, thanks to its attractive risk- adjusted return and
inflation proof rental growth.
