UBS: weakened macro environment influences a mitigated property downgrade for five-year returns

The change in direction on ECB policy – specifically, the return of Quantitative Easing and further deepening of negative interest rates – is forecast to lead to a sharp compression of eurozone government bond yields. UBS’ yield forecasts have been upgraded as the asset manager no longer expect a tightening of risk premia towards the end of the forecast period resulting in rising property yields.

Gunnar Herm, Head of Research & Strategy Europe, UBS-AM Real Estate & Private Markets, explains:

“Over the five-year period (2019/23) our all property forecast is now 5% versus 4.2% six months ago. However, it’s not all positive news as we have taken steps to notably downgrade our retail forecasts as we expect the structural changes to accelerate re-valuations across Europe. This is partly based on our experience of the UK/US markets over the past few years.”

UBS’ five-year retail forecast now stands at 2.9%, down from 3.7% six months ago.


Aggregate returns for eurozone office markets have been upgraded for both the three- and five-year forecasts (5.6% and 5.1% respectively), largely due to the change in expectations for the interest rate rises outlined above.

Herm explains:

“We are also yet to see the start of any meaningful supply response which helps maintain a positive outlook for rental growth, despite a slightly weaker economic environment. This is particularly the case for prime rents in core locations where supply is extremely tight in most markets.

“In terms of the expected performance of individual markets the rankings remain relatively similar. The Netherlands is now the clear top performer as the strong capital and rental growth from 2018 has continued into 2019.”

This has resulted in a double-digit total return forecast for this year with positive momentum continuing into 2020. German offices are still in very high demand from investors which is helping to drive some further inward yield shift in addition to positive rental growth, added UBS. At the same time, Portugal is also attracting increased levels of investor interest and still benefits from a structurally high-income return.


The retail sector continues to have a subdued outlook with forecasts downgraded again in this round, says UBS, due to ongoing occupational pressures and rental decline accelerating faster than anticipated in several locations.

Herm adds:

“This is due to ongoing growth in the e-commerce sector as well as weakening demand from retailers for new expansion. The ranking remains fairly similar, and we expect Southern European countries to see above average returns, due largely to e-commerce being less advanced in these locations.”

Portugal leads the pack, followed by Belgium and Austria with Germany, Ireland and France expected to see below average returns, forecasts UBS, which added that it is expecting the investment environment to remain very challenging for the foreseeable future as buyers remain uncertain about the ‘true’ value of assets.


“We have once again upgraded our industrial forecasts, as the sector continued to benefit from both yield compression and rental growth. However, we feel in the next few years this will moderate yet values will be supported by lower for longer bond yields.

“We are expecting strong capital growth in 2019, as investors continue to buy European industrial despite the difficulty of underwriting at the current elevated pricing. Despite high absolute prices, Europe continues to offer a premium to the US and UK markets. However, as rental growth tends to be far less stellar in the eurozone than in these markets, it is unlikely yields will fall quite as low. Nonetheless, we are expecting continued capital and income growth over the next three years, with the top picks being the Netherlands and France.”

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