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Portfolio performance more variable due repricing: M&G

Property investment still offers prospects for income and growth despite the fact that property yields are under increasing pressure globally as interest rates rise and as investor’s become more risk averse, investment manager M&G said in its end-of-year Global Real Estate Outlook report.

The report states that asset repricing will lead to greater variation in the performance of portfolios, and is likely to accentuate the divide between prime and lower quality assets. However, it will also create new investment opportunities, particularly for investors willing to engage in more substantial refurbishment to target attractive risk/adjusted returns, once the recession has passed.

M&G also points out that the preference for alternatives such as residential and student housing will increase as structural and cyclical changes affect more traditional market segments.

In both the UK and Europe the cost-of-living crisis is emphasising the importance of investments with a positive social impact and well-defined ESG-compliant portfolios.

The war in Ukraine has increased uncertainty and affected energy supplies and pricing in Europe although interest rates began to rise later and at lower levels than in the US and UK. Their peak is likely to be lower in Europe so property yields will need to expand less.

In Europe’s office sector, increasing occupier standards means better prospects for best-in-class office assets in contrast with the ‘brown’ discounts for older assets, which are likely to accelerate, “mirroring the trends seen in parts of Retail in recent years”.

M&G said that in the UK, strong labour market dynamics and low unemployment combined with Brexit-related worker shortages suggests households are better cushioned from some of the harsher effects of economic downturn. However, the tight labour market with strong wage growth will fuel inflation.

Further interest rate hikes are likely, but rapid rises in property yields are making real estate assets cheaper, leading to them offering improved, long-term value.