Prime shopping centres set to outshine following repricing

Prime shopping centres are projected to have the highest returns (7.4% pa) of any sector, due to their attractive current yields and projected tightening, and are set to become the most attractive asset class, according to property investment manager AEW.

The firm forecasts that the yield movements in the sector over the past two years will make prime shopping centre returns better than other sectors.

AEW said significant re-pricing means that shopping centre yields will tighten 30 bps during the next five years.

AEW has made the claim in its European Annual Outlook for 2022, which examines how investors can re-align portfolios in a post-Covid-19 world. The report explores the new environment for real estate in the context of bond markets pricing-in an expected change to monetary policy as a response to rising inflation.

AEW said the assumption that inflation will lead to higher bond and property yields will also restrict capital value growth across all four main sectors: retail, logistics, residential and offices.

However, the firm added that shopping centre and high street retail yields have widened by over 120 and 50 bps respectively since 2018. “Due to this past re-pricing, their yields are forecast to tighten by 2026 by 30 and 15 bps, respectively,” AEW said in a statement.

Post-covid rebound surprises ‘on the upside’

“The post-Covid macroeconomic rebound has surprised on the upside,” said AEW managing director Hans Vrensen, head of research and strategy. “However, this stronger than expected growth combined with supply chain disruptions and associated shortages have triggered higher inflation in both the UK and Eurozone.

“Until recently, the consensus was for inflation to settle down, but investors have already priced in a hike in interest rates and a tapering of quantitative easing by central banks. In other words, we need to consider what the impact will be from higher inflation even if lower for longer interest rates remain our base case.”

He said that if it endures, a new higher inflationary environment has consequences for real estate investors and rising interest rates and bond yields could be expected to restrict capital value growth across the board.

“With over 200 bps in excess spread (between expected and required returns) in our base case there is sufficient cushion to deal with an increase in inflation-driven bond yield widening. However, our base case analysis indicates that we could see a strong recovery in retail, specifically prime,” he added.