European commercial property offering better investment value than Asia Pacific, real estate investment group claims

Written by Ray Clancy

Tuesday, 20 July 2010 10:54

European commercial property offers significant investment opportunities as Asia Pacific real estate begins to look increasingly expensive, according to experts.

Commercial property yields in Asia Pacific are at historically low levels and while the long term story for Asia Pacific remains positive there are likely to be better entry points, according to an analysis by Fidelity Real Estate Investment Management.

Better opportunities can now be found in parts of Europe including the north and west of the region, says Matthew Richardson, head of research. He believes while the long term case for investment in Asia Pacific is undeniable, there are likely to be better entry points to the market down the line.

‘The western inspired credit crunch has accelerated a move to Asian Pacific property markets as investors have continued to search for double digit returns. As a result of this weight of money flowing into Asian property, the short-to-medium-term outlook is challenging as lower initial yields now discount very aggressive rental growth assumptions,’ said Richardson.

‘In terms of relative value per unit of risk, we believe there are better opportunities to be found in parts of Europe, especially in the north and west,’ he added.

The increased investor interest in Asia Pacific has pushed property yields down and some markets are now trading at a significant premium to US and European property.

‘While the long-term fundamentals of Asian property are compelling, from a short term point of view, the market looks expensive relative to other regions. Given the extra volatility traditionally associated with Asia Pacific property and the extra risk implied by the high degree of speculative development, investors may want to consider whether they are prepared to pay a historic premium for the right to invest in the property at present,’ explained Richardson.

‘At the prevailing prices, investors should carefully weigh up their risk reward expectations for, and exposures to, global property markets,’ he added.

Looking at the global picture Richardson believes that although the US market is priced attractively, it is currently at significant discount to its long term average, however, European investors should remember to factor in currency risk, which could reduce its allure.

‘On the other hand, Europe looks attractive at current yield levels and benefits from a broader range of lease structures, as well as greater liquidity and transparency. While southern parts of Europe can expect to see more consolidation, northwest Europe is largely through the correction in capital values. There is increasingly value to be found in selected deals in high-quality non-prime assets for property managers willing to place a premium on thorough fundamental research,’ he added.