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INVESTORS SHOULD FOCUS ON LONG TERM OPPORTUNITIES IN ‘NEW NORMAL’ OF LOW YIELDS, SAVILLS IM REPORT SAYS

  • Report pinpoints opportunities for 2017 in Europe’s winning cities, urban logistics, alternative real estate and tactical asset management 

Investors in Europe should focus on long term opportunities in ‘winning’ cities, urban logistics, alternative real estate and tactical asset management, according to a new report from Savills Investment Management (“Savills IM”), the international real estate investment manager.

The report, entitled Changing Landscape:European Outlook 2017, projects that European real estate markets on average have sufficient momentum to perform relatively well. Locations devoid of new supply are expected to see rental growth, and weight of money is sufficient to push prime yields down. Savills IM recommends risk adverse investors should focus on a defensive and income minded approach towards real estate, avoiding the temptation of moving up the risk curve and valuing assets higher than their intrinsic value which could lead to underperformance over the longer term.

The report likewise highlights that investors should beware of political unrest, the threat of terrorism and Italy’s brewing banking crisis.

Kiran Patel, Chief Investment Officer at Savills IM, commented:

“In the ‘new normal’ of low growth and low interest rates, delivery of what would be high real rates of return – considerably higher than in the past – could be considered as unrealistic. Something has to give. Either those target returns are reduced or the property market has to see a severe correction in capital values to improve entry prices.

“2017 is likely to be characterised by increased uncertainty, over whether the UK can retain beneficial access to the single market after the triggering of Article 50, the effect of US economic and foreign policy and the trend of surging populism across Europe. We recommend a defensive, income-focused approach towards real estate for risk adverse investors.”

Opportunities outlined in the report include:

Winning European cities:As the returns in traditional winning, larger global cities such as London, Paris and Berlin continue to mature, alternative opportunities can be found in 18-hour cities that offer walkability, short commutes and affordability to live and work. These new winners have good connectivity to the major cities and are likely to see future demand across the commercial real estate sectors. Such cities include Copenhagen, Oslo, Helsinki, Istanbul, Prague and Munich.

Urban logistics:Urban logistics is one of Savills IM’s preferred sectors in Europe, particularly in markets where Internet sales as a proportion of total retail sales are at or about to exceed the 5% threshold. This is certainly the case in the UK, Germany, France, Sweden and the Netherlands, but countries such as Spain, Italy and Poland are catching up.

Alternative real estate:Long-term trends in urbanisation and demographics support the appeal of alternative segments such as residential, student accommodation, care homes and medical centres and clinics. At the same time, the demand and supply conditions in some markets and the index-linked income of some of these asset types may deliver positive rental growth prospects in the future. The key sectors that will see strong activity this year are the multi-family, automotive, healthcare and socio-infrastructure markets in the UK, Germany, France, the Netherlands, the Nordics and, increasingly, Spain.

The report identified specific buying opportunities in Brussels’ central business district (CBD); sought-after locations in Amsterdam’s South Axis and city centre; Warsaw offices on long leases and core offices in Germany’s Big Seven as well as growing secondary cities in the country; edge-of-CBD offices in Stockholm; prime high street shops in Copenhagen and Helsinki; key cities in Germany and well-located retails parks in Austria, Italy, Spain and Germany; mixed-use high street properties in Warsaw; and mainstream residential in London.

It also notes buyers should approach with caution a number of sectors including central London offices until certainty emerges over the Brexit negotiations; chasing yields down on properties with fuller rents in Munich, Paris CBD and Stockholm; buying fringe or out-of-town locations in Warsaw; and being attracted to higher-yielding secondary assets that have limited rental growth potential in France, Germany, Italy and the UK.