Nuveen: investors refocus on fundamental differences between sectors

Headline investment activity remains historically strong, but volumes are retreating slightly, according to Stefan Wundrak, Head of Research, Europe, at Nuveen Real Estate. In a Q3 outlook of the European market, Wundrak continues:

Offices continue to benefit from rental growth, but the medium-term outlook is more muted. Rising sector allocations drive investment volumes and pricing for logistics. Strong construction activity supplies product.

“Retail valuation in Continental Europe has fallen for two consecutive quarters. France, Germany and Central and Eastern Europe defy the downward trend much better than other markets. Niche living markets are developing fast, but secular opportunities seem largely priced in.”

The logistics sector still benefits from underweighted investors who are increasing allocations substantially, says Nuveen, adding the sector remains priced for growth.

Wundrak continues:

“While we also expect logistics rental growth significantly above previous cycles, recent deals seem to imply aggressive growth expectations that the market is unlikely to deliver on. Double-digit rental growth across many office markets have vindicated low yields in the office sector over recent years. Yields haven’t compressed further over the last 18 months, implying that the rental growth cycle is expected to slow down from 2020 onwards.

“2019 is poised to deliver another year of good rental growth based on solid demand and a relative disciplined supply response so far. However, despite interest rate rises pushed beyond 2020 it is hard to see what could drive a further sharpening of cap rates.”

Elsewhere, Nuveen says the residential sector is “internationalizing” largely along niche sectors, such as micro-apartments, co-living, senior living and student housing.

Wundrak continues:

“Similar to the logistics sector, living investments have secular winds in their sails; most investors are under-allocated and the sector is bolstered by demographic changes driving a shift in demand. Investors face a similar dilemma as with logistics. Do secular trends like rising tourism and growing international student numbers justify the high valuations?

“Retail, on the other hand, is becoming increasingly unloved as the challenge of e-commerce is filtering through the system. On a pan-European basis, valuations have been drifting downwards over the last six months. Losses have so far been confined to more secondary assets, where yields have decompressed, leaving only Germany and France largely untouched.

“The former remains relatively insulated due to high investment pressure and consumers being supported by the strong economy. We expect values to continue to soften this year with no market escaping value adjustments.”

james.wallace@realassetmedia.com