The industrial sector is still expected to be the strongest performer, with a total return of 8.0% and is followed by the office sector (4.6%) and then retail (3.9%), predicts UBS-AM. The asset manager’s research team says the industrial sector continues to benefit from robust occupier demand from retailers, third party logistics operators and higher yields.
Gunnar Herm, head of real estate research and strategy for Europe at UBS-AM Real Estate & Private Markets, explains:
“Industrial property continues to see very high levels of demand as competition to optimise distribution networks between retailers and etailers intensifies. Manufacturers are also keen to ensure they have sufficient logistics capabilities as there are signs that supply chains are becoming more locally focused. Smaller units are particularly in demand as there has been much less of a development focus on estates, particularly in and around cities.
“Anecdotally we are hearing there is very little available space in most eurozone markets. Completions have risen across the eurozone but the majority of space under construction is bespoke and expected to be pre-leased to a tenant before completion.”
The retail sector on the other hand is starting to be impacted by structural headwinds, which is dampening rental growth and investment activity. However, this remains an inconsistent picture across the eurozone.
For example, investment volumes in the Netherlands and Germany were down 39.8% and 26.9%, while investment increased 8.7% in Spain. Availability of investment product was limited in Germany and prices were high which constrained activity, while the volume changes in Netherlands are more reflective of changing market sentiment. In contrast, retail markets in southern Europe recorded increases in investment volumes (10.1%) due to stronger sentiment and a less immediate impact from structural headwinds.
Aggregate returns for eurozone office markets are virtually unchanged over the past six months, despite the slightly weakened rental growth outlook for most markets against the backdrop of a slower eurozone economy.
UBS-AM says the Netherlands is expected to be the strongest performer at the all property level over the next three years with Portugal and Spain close behind. These markets are expected to benefit from strong capital growth as a result of rental growth and some further front-loaded yield compression.