Offices to deliver best returns, time to invest again: AEW
It is time to invest in European offices again, delegates heard at Real Asset Media’s Debt Investment briefing, which took place recently in Frankfurt, hosted by Ashurst.
“Office sentiment is still very low as investors have suffered such losses, but our forecast is that offices will post the highest total returns,” said Hans Vrensen, managing director research and strategy, AEW in his keynote presentation.
“I accept it is a difficult conclusion for investors who have suffered a hit in the past, but the negative sentiment is overdone,” he said. “I believe that if you start now, if you invest new money today, then you really should consider offices.”
This is partly due to the rebound effect: the lower valuations have fallen, the bigger the recovery off a low base will be.
“The repricing is now nearly done, and the office sector has taken the most massive hit,” said Vrensen. “Capital values have declined by 26% across Europe, compared to a 16% fall for all other sectors combined. Within the general recovery, we expect a stronger recovery for offices because their valuations have gone down so much.”
Vacancy rates in the office sector are still high across Europe, but are trending down. The working-from-home trend will inevitably reduce demand for offices, but the negative impact of this will be limited because supply is so constrained.
“Occupier markets have done well in Europe, where vacancy rates are 8% on average, much better than the US, where they are in double figures,” he said. “This is because the supply of new buildings is much more modest than in the US.”
Limited supply is also supporting rental growth across asset classes, despite limited economic growth. Sentiment is recovering and the macroeconomic picture is positive in Europe, as GDP numbers are improving and the UK and Germany are out of their shallow technical recessions.
“The central banks have done a good job to keep the recovery in line,” said Vrensen. “Looking at real estate, swap rates are stabilising which is good news, borrowing costs are just over 4% in the Eurozone, although they are higher in the UK, and yields have gone up massively, so debt will become accretive again.”
Offices and logistics assets are set to deliver near-double digit returns, followed by shopping centres and residential, according to AEW research. Looking across the markets, the UK will deliver the strongest returns, followed by Benelux, CEE and Germany (another rebound effect). “The UK is number one, partly because their bond yields are higher and that has an impact on returns,” said Vrensen.