Property is one of the sectors invested in by multi-asset funds, the others primarily being equities, fixed income, commodities, and cash. Post Covid property investment and in particular into office space, has been under pressure. But abrdn has raised its outlook for property again amid European ‘construction crunch’, including being more upbeat on office space, which it no longer sees as such a drag on overall returns.
The global investment company, which manages more than £30bn of real estate assets, recently upgraded its house view on real estate for a third quarter in a row.
Anne Breen, Global Head of Real Estate at abrdn, explains the company’s views.
“The year kicked off with a somewhat shaky start for real estate given wobbles in the gilts market. However, we are accustomed to short-term volatility and remain convinced the property market correction is over and we have entered a new growth phase – at least for high quality assets.
“Europe and the UK are facing a persistent construction crunch because of high costs and planning permission hurdles. While solving this is key to Europe’s long-term prosperity, and will help to unlock our own long-term ambitions, the reality is in the short term, this should further support property valuations.”
Construction crunch
“Construction new orders in the EU were down by 14% year-on-year in December according to data from Eurostat. This continues a theme of stop-start construction activity across Europe dating back to the Global Financial Crisis. With build costs still elevated, development financing costs still high and nervousness around the impact of Trump on the global economy, it is hard to see a market scenario that results in materially higher construction activity in the short term – although there is a clear commitment from policymakers to crack the construction conundrum.”
Improvements in office markets
The biggest change in abrdn’s forecasts is that it now expects offices to act as less of a drag on returns.
Capital value declines for the office sector have become less severe and Breen says the company even sees the potential for double digit returns in some office segments this year, including London’s West End, Paris Central Business District (CBD), Madrid CBD and central Amsterdam. Low-quality office stock remains under pressure but, for prime offices, tenant demand is strong and rents rising.
Even so, at a sector level, abrdn continues to prefer residential and logistics. Some of its highest conviction calls this year are in European logistics and the build-to-rent sector, which in the UK includes abrdn’s joint venture with John Lewis Partnership. Overall abrdn’s residential investments broke €10bn last year.
Anne Breen says: “While we have been underweight offices for a number of years, we have noticed a significant improvement in prospects for the sector and believe there will come a time when investors without an office exposure will underperform. Of course, the questions investors will now need to consider are: when does that time come and what does a performing office look like?”
She adds that abrdn is forecasting three-year annualised total returns for European real estate to be around 9%. For UK, its forecasts are still healthy but slightly lower, as it is a taking longer for the UK’s borrowing costs to fall and the path of interest rate cuts to materialise.
In the UK, offices have jumped up abrdn’s sub-sector rankings. West End Offices (abrdn’s preferred office sub-segment) have climbed to 5th in the ranking – up from 12th out of 34. Mid Town Offices have risen to 17th from 23rd.
Within Europe, abrdn expects the Netherlands, Spain, Portugal, Denmark and France to be the best performing markets over the next three years. By contrast, the Czech Republic, Switzerland and Poland are expected to underperform.
In Europe, abrdn is forecasting that logistics, residential, core offices, retail parks and hotels will outperform the wider market over the next three years.
It continues to expect the wider offices market and weaker retail to underperform – but does see pockets of opportunity within that.
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