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UBS: global yields are broadly flat, volumes down and returns start to converge

In its quarterly survey of over 330 city-sector markets globally, UBS found yields were unchanged in the around two-thirds (68%) of deals. A small number saw falls in cap rates and yields (17%) while a similar number saw increases (14%). Overall, interest rate cuts this year will likely have provided some renewed downwards impetus on yields in some markets, says UBS in its Q4 Real Estate Outlook report.

Fergus Hicks, real estate market strategist at UBS Asset Management, explains:

“At the very least, outside of the retail sector, they should prevent yields from rising. Retail is the only sector where we think yield rises are likely in the near term, particularly in lagging markets, as retailers battle with structural change. In the medium term we do not expect any sharp rises in yields and cap rates following the extended period of falls in the wake of the GFC. Moreover, investor interest in real estate remains firm, which is supporting current pricing.”

Real estate continues to provide positive returns, with performance varying by market. Our expectation for some time has been that returns will slow and this is being borne out in markets which report performance at a higher frequency. Compared to 4Q18 most of these markets have shown some slowing in returns this year, with only two markets recording a mild acceleration. In 2Q19 annual returns were slightly higher in France and Japan compared to 4Q18. All other markets showed a slowdown, modest in the cases of Italy, the US and Canada, and sharper in the UK, Netherlands, Ireland and Australia

According to Real Capital Analytics (RCA), global investment activity was down 7% in USD terms in 3Q19 from a year earlier. Americas volumes were down 6%, with a particularly sharp drop recorded in the retail sector although partially offset by a strong industrial market. In the UK, volumes were down 34% in USD terms and lower across all property types. The rest of EMEA fared better, with little change in activity in most sectors and overall volumes up 1% in USD. In APAC, the office sector fared the worst, dragging all property volumes down 9%.

Returns in the UK slipped to 2% YoY in 3Q19 from 6% in 4Q18, according to UBS, with the retail sector as the key driver of deteriorating performance. Industrial and offices held up much better.

Fergus Hicks added:  

“With an election looming on 12 December and Brexit still unresolved, uncertainty hangs over the UK. However, foreign investors are waiting in the wings, looking for a possible currency play and ready to act if the Brexit fog clears. Moreover, office yields in the UK look high versus some other core European markets. With returns slowing in most markets, we think they will converge to around the 5% p.a. level over the next three years, with little significant differentiation between markets.”

james.wallace@realassetmedia.com