DWS has revised its five-year forecast for all property yields downwards by around 25 basis points, with income return as the main driver of returns over the period. DWS now expects a prime all property total return of around 4.0% per annum over five years, an upward revision of 50 basis points from DWS’ 2018 year-end forecasts.
Simon Wallace, Head of Research, Europe, at DWS, explains:
“Clearly this is a significant reduction compared to the 13.0% per annum achieved over the past five years, and also some way below the historical average of 10.0%. However, we are in an unprecedented environment of sustained low-interest rates, and in this context, there is still a clear case for investing in real estate, given the returns currently on offer from fixed-income investments.
“Looking at the performance of the underlying assets in both the INREV and MSCI indices, the Netherlands and Germany remain particularly strong performers, although the Dutch market carries a heavier residential weighting. The French market is also performing well, but the UK has been somewhat of an underperformer of late.
“At the sector level, logistics and residential are clearly out in front, with annual fund-level returns of 17% and 15%, respectively. Office also continues to perform relatively well, while retail is firmly bringing up the rear, with quarterly returns turning negative. We expect retail to be a major drag on performance over five years, with shopping centre prime total returns of just 2.2% per year, although with prime shopping centre values already down by more than 10% and further decline to come, retail will account for a smaller proportion of the total investment stock than in the past.
“Conversely, as alternative investments such as private rented residential, hotels and student housing become more and more part of the institutional market, these sectors will have an increasing influence on all property performance. While we don’t believe that any sector can sustain the exceptional returns of recent years, these sectors, together with logistics, are well positioned to benefit from more structural and long-term performance drivers. Logistics remains our strongest performer, at 7.2% per annum, but private residential should also provide an above average prime total return of 5.1%.”
At the market level, DWS still expects Iberia and the CE region to be clear outperformers within almost every sector. With expected annual returns of 8-9% between 2019 and 2023, residential is set to be a strong performer here, but the institutional market is still immature in both regions.
Within southern Europe, the Italian market is generally being pulled back by a weak national economy, although we expect logistics in Milan to prosper thanks to its strategic importance and expectation of rising online sales.
In core Europe, DWS is generally forecasting lower returns, although Brussels, Helsinki and select French markets are still expected to come out ahead of the European average for both offices and logistics. Finally, DWS anticipates that the UK will outperform core Europe over five years, assuming an orderly Brexit, which is itself a significant assumption.