UBS: European volumes declining at snail’s pace while yields remain at record lows

Annualised investment volumes to Q3 have continued to decline for the seventh consecutive quarter, according to RCA data, down 5% on the previous year, as weakness in Germany and the UK was offset by a South Korean-driven spike in France, where volumes increased by 16%.

Spain and the Netherlands saw volumes drop off by around 10%, while – surprisingly – Italian volumes jumped 52%, although from quite a low level, RCA data shows.

In its Q4 Real Estate Outlook report, UBS wrote:

“The outperformance of France can largely be explained by Paris overtaking London as the city attracting the most investment in 3Q19. The UK capital has long been the unrivalled location for investment, but political uncertainty in the UK, as well as a strong influx of South Korean money into mostly Parisian offices, has swung the balance the other way. Nonetheless, the UK remains the first port of call for foreign capital entering Europe for the first time, with 70% of first-time buyers making their first acquisition here. Additionally, cross-border investors are still net buyers of the UK, signifying it has perhaps not yet lost its international appeal.

“In any case, there is a strange logic to European investment markets at present. While volumes are not growing, they are also not falling substantially either, which with yields at record lows one would expect to happen at some stage. However, with government bond yields now negative in many locations, there is downward pressure on yields as institutional investors are forced to increase allocations to achieve a positive real return.

“As a result, prime yields continued to compress over 3Q19, with the combined prime yield coming in a further 15 basis points to stand at a record low of 3.6%. This indicates pricing is moving away from any absolute return target, rather relying on the spread over government bonds.”

UBS says investors have turned to alternatives, which have the added benefit of being less cyclical than the core sectors. Investments in senior housing rose 14% on the year, while hotels rose 2%. Apartments remain in vogue and saw YoY investment jump by 7%, while the rate of home ownership continues to decline in most European countries. This particular sector is subject to operating and regulatory risk, however, which we explore further in our viewpoint below.

“Overall, our forward-looking expectations for European capital markets are defined by the continued ‘lower for longer’ interest rate environment. Therefore, in spite of high pricing, we do not foresee a significant reversal over the next 12 months,” UBS adds.

james.wallace@realassetmedia.com