CBRE 2020: lower interest rates for longer while prime yields are nearing floors

Investors are increasingly favouring real estate in multi-asset portfolio allocations, so CBRE expects 2020 volumes at least around the 2019 level in continental Europe, with a possible rebound in the UK.

The ‘lower for longer’ scenario is a favourable one as it supports a comfortable real estate premium over government bonds. Having said that, CBRE sees two concerning side effects for real estate:

  • Lower yields mean investors must reduce their return requirements, starting with value-add strategies, and/or consider higher risks; and
  • Yields are converging, narrowing risk premia within property as an asset class Bond yields may have gone negative in parts of Europe but prime property yields appear to be nearing their floors, except for our expectation of some further yield compression for the very best assets in Europe.

Pierre-Edouard Boudot, Senior Director – Research and Prospective, at CBRE explains:

“This is likely to be accompanied by a widening spread between London and other European cities, as long as Brexit uncertainty persists. Some specific markets or asset classes (datacentres, senior/student housing etc.) should also experience yield compression as a result of investors widening their criteria beyond mainstream asset types in search of enhanced returns. In the medium term, we do not expect yields will return to the levels that preceded the GFC, as the equilibrium level of interest rates, for various reasons, is now significantly lower.

“2019 will have seen property investment levels in continental Europe slightly lower than the record year of 2018, down by a mid-single digit percentage, due to supply shortages in certain markets, including Germany. The decline, however, will be more pronounced in the UK, given the continuing uncertainty regarding the timing and impact of Brexit.

“Looking forward, in the context of strong liquidity maintained by central banks, investors are increasingly favouring real estate in their multi-asset allocations, attracted by its yield compared to other asset classes and the safe haven offered in the face of monetary erosion. One study notes an increase in target allocations to real estate (to 10.6%) for a sixth straight year.”

CBRE added that despite decelerating churn, 2020 investment volumes should come in at around the 2019 level in continental Europe, with a possible rebound in the UK, depending on the progress of Brexit negotiations. With investors faced with entry values that are already cyclically-high, the market’s attraction derives partly from property’s favourable return spread over bonds: in other words, institutional investors (insurance companies, pension funds, etc.) will continue to display an almost ‘forced appetite’ for real estate.

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