According to AEW’s latest study, “Annual Outlook”, logistics and prime shopping centers are expected to generate the best returns in 2023-27, while housing and logistics are the most robust sectors in terms of rental growth.
According to the study, only five markets are considered attractive in the analysis of risk-adjusted returns, while 47 are considered neutral out of the 168 markets covered. “This means that investors can expect to achieve the return required to be compensated for the risks associated with these investments on only 30% of the property markets covered”, the council clarifies.
Among the five markets considered attractive in the analysis of risk-adjusted returns, we find urban logistics in Paris, logistics in Berlin and Zurich and first-class shopping centers in London and Stockholm. In France, two markets covered by the analysis, in addition to city logistics, are considered neutral because they still offer attractive risk-adjusted returns: the housing market in Île-de-France and logistics in the Lyon region. “The other French markets are considered less attractive. »
A financing gap of 24 billion euros for the next three years
AEW expects annual investment volumes for the European commercial real estate market to be around €260 billion. in 2022, with €218 billion. already invested in the first three quarters. “After the entire record year of 2021 with €350bn invested, this drop reflects the impact on investors of the doubling of borrowing costs over the past ten months. »
In addition, a financing gap of 24 billion euros is estimated for the next three years in the UK, France and Germany, while the refinancing of overdue loans will be confronted by the fall in asset values and the lower risk appetite of lenders which will require lower LTVs. “For France alone, this funding gap is estimated at 5 billion euros. As after the global financial crisis, this provides an investment opportunity for equity or debt investors with capital ready to be deployed. »
The highest yield for logistics
Projections for prime total returns in Europe remain positive in the period 2023-2027. “The average total return forecast across all our 196 markets has been revised downwards due to the expected decompression in dividend rates to 4% per annum from 5.8% per annum last year, the board states. This is due to the recent increase in the government interest rates, which push property interest rates up and thus limit capital growth. »
According to the AEW survey, the logistics sector is expected to generate the highest returns over the next five years at 5.4% per annum, with rental growth offsetting the expected decompression in yield rates.
Prime malls, meanwhile, occupy “the second position in our forecast, with total returns expected to be 5.1% per annum over the next five years due to high access rates, the council says. Malls are expected to enjoy the highest – and relatively stable – rental yields over the next five years. »
In addition, housing and logistics are the sectors that show the most robustness in relation to relative growth. “Rising debt costs and construction costs, along with environmental regulations, further limit new supply, shielding most markets from the impact of an economic downturn that would lead to lower demand.”
Also according to the study, the impact of telecommuting is less significant than originally expected, with only an 8% increase in the number of employees working remotely compared to pre-pandemic levels. The expected growth in office jobs between 2022 and 2026, adjusted for the development of teleworking, has been revised upwards in London, Amsterdam and The Hague compared to AEW’s previous forecast.
Irène Fossé, European Research & Strategy Director at AEW, said: “Unsurprisingly, logistics remains the most attractive sector due to the expected rental growth, despite the significant increase in yield rates, higher than for other typologies. Housing should also benefit of a high rental yield over the next few years. Prime shopping centers remain attractive in terms of total returns. As for the impact of telecommuting on the office sector, it appears to be less significant than expected. What is certain is , that new supply is suffering from the increase in financing costs and construction costs in all sectors. We expect that these constraints on future supply will offset the negative effect of the economic slowdown on demand for real estate. »
“The first cross-border war in Europe in 80 years saw inflation rise to record levels,” adds Hans Vrensen, Managing Director, Head of Research & Strategy Europe at AEW. Although in our central scenario we estimate that the peak of inflation is now behind us, the economic situation and the increase in financing costs have a negative impact on property markets. Investors now face a less favorable market environment. However, our analyzes show that there are still opportunities for investors who are positioned in the right markets and with capital ready to deploy. The last few years have shown us that the macroeconomic environment can change quickly. Our forecasts cover a five-year period, but we believe that investors need to be better prepared in the current highly volatile environment, as the situation can develop positively or worsen. »