Average global real estate returns predicted to fall sharply in 2011 and 2012, survey shows

News - Banking

Written by Ray Clancy

Friday, 08 October 2010 08:15

Expectations for average total returns in the real estate sector are falling sharply across the globe as economic uncertainty, reduced access to finance and more stock coming onto the market has an effect, a survey suggests.

The Global Property Survey by bfinance forecasts lower property returns in all major regions through to 2013.

It also found that the rental outlook for the office sector in Europe is vulnerable to government cutbacks and the UK is likely to be the most impacted in the short term with average total return for the office market in 2011 falling by 30% to 5.8%.

Russia emerges as the bright spot for return driven investors with double digit returns forecast for 2011 due to its strong commodity based economy and the recovery in energy prices, according to the poll of major real estate managers with combined global property assets of more than Euro 1.7 billion.

‘Despite some variation in forecasts the overall trend is unmistakable. Forecasts for property total returns over the next three years have started to wane partly in response to uncertainty over prospects for economic growth and the subsequent impact on occupier markets. This combines with bank financing issues and additional supply of stock for sale, providing unwelcome news for institutional investors,’ said Vikram Aggarwal, senior associate of bfinance.

Within regions, the survey showed a surprisingly pronounced downward revision for expected total returns from property in Emerging Asia which includes China, Taiwan, South Korea, India and Malaysia through to 2013. Whilst the economic outlook there remains bright, the markets are vulnerable to liquidity and volatility risks and lack of transparency, in addition to any slowdown in growth expectations, the report says.

In response to greater uncertainty, investors are looking to higher quality real estate investments which are more resilient to a downturn. Survey participants noted a greater focus on the quality of location and tenants in addition to a bias to larger, more mature, risk-averse and transparent markets. London, Paris and the Nordic cities are identified as particularly well positioned to attract investment.

‘Returns generally still remain quite robust and after some recovery in property yields in 2009, downward revisions to forecasts might be expected. However, a renewed real estate slowdown globally is clearly of concern to investors and economic expectations will be monitored very carefully over the coming months for further signs of deterioration,’ added Aggarwal.