UBS: 2019 data supporting well-trailed moderation in real estate returns
Annualised capital growth has now slowed from 5.4% in 2015 to 2.8% in 2018, according to MSCI data. Weaker sentiment over the global economy at the start of the year seems to have impacted real estate investment activity, says UBS in its Q2 Real Estate Summary.
UBS wrote:
“The first quarter is normally quieter following the rush to get deals across the line by the end of the year. However, even after allowing for the seasonal lull, the market was softer and volumes were down in 1Q across all regions. At the global level, Real Capital Analytics (RCA) reported transactions worth USD$167bn on income-producing properties in the first quarter, down 23% on the same period in 2018. APAC was the weakest market, with volumes down 36%, while in Europe they fell 32% and in the US 11%.
“At the sector level, all types of standard commercial property saw significant falls, along with hotels. The residential sector bucked the trend and showed more resilience, with volumes falling just 5% YoY.
“Overall, we think slower investment activity reflects a number of factors, including weaker sentiment over the economy through the first quarter, political uncertainty and real estate prices which have reached high levels in some markets. A lack of stock for investors to buy is also likely to be holding back volumes, while a mismatch in price expectations between buyers and sellers has prevented some deals.”
UBS argues that if sellers are unable to achieve the prices they want they are happy to continue to hold on to the real estate rather than sell it at a perceived discount.UBS says transaction activity for 2019 will be healthy, but below 2018 levels.
UBS continued:
“At the same time as transaction activity slowed, cap rates and yields levelled off in the majority of markets. Of the sample of over 300 markets we monitor across the world, a net balance of just 7% reported a fall in cap rates and yields in 1Q, down from a net 10% reporting a drop in 4Q18. The markets reporting declines were focused on the industrial sector, including logistics markets in Germany, while some office markets also reported falls, including Frankfurt and Melbourne. A significant number of retail markets reported rises, such as shopping centers in France, Germany and the UK.
“In the retail sector valuations are now beginning to move to reflect the severe structural challenges that traditional retailers are facing. This is ultimately impacting their profits and ability to pay rents. The UK is one of the markets most advanced in its correction and its retail valuations began to move downwards around mid-2018, with MSCI reporting retail values down 6% for 2018 as a whole. In the US, NCREIF reported retail values down 2% for the year.”
