Principal Real Estate is a top 10 global real estate manager1 with $95.5bn in assets under management as of 30 September 2023. Providing access to capabilities across the spectrum of public and private equity and debt, our in-depth market knowledge, experienced teams, and extensive connections across all four quadrants of real estate, help us to maximise opportunities and find the best relative value on behalf of our clients.
Principal Real Estate built our reputation as a knowledgeable and trusted adviser to institutional investors on six decades of commercial real estate experience2. We adopt a consultative partnership approach with clients, providing choice and customisation to help meet any unique risk and return objective.
With seasoned teams of investment professionals around the globe in the United States, Europe, Singapore and Australia delivering comprehensive research and market coverage, clients can benefit from our distinct 360° perspective of real estate space and capital markets.
Our European platform delivers access to diversified and sector-specific strategies. We provide exposure to core European real estate in traditional sectors like office, retail, and logistics. Clients can also access specialised alternative sectors like data centres, hotels, residential and health care.
The senior management team’s extensive core and opportunistic track records – particularly in private equity and specialist alternative sectors – help us realise value where others cannot. Our long-standing relationships in most major European markets and our expertise in sourcing and executing complex, management-intensive strategies provides clients with a broad real estate opportunity set.
We’re able to access real-time market information, track deal flow, and understand regional market dynamics with our team of local transaction professionals in the UK, Germany, France, Spain, Portugal, Italy and the Netherlands.
1 Managers ranked by total worldwide real estate assets (net of leverage, including contributions committed or received, but not yet invested; REOCs are included with equity; REIT securities are excluded), as of 30 June 2023. ‘The Largest Real Estate Investment Managers’, Pensions & Investments, 9 October 2023.
2 Principal Real Estate Investors became registered with the SEC in November 1999. Activities noted prior to this date were conducted beginning with the real estate investment management area of Principal Life Insurance Company and later Principal Capital Real Estate Investors, LLC, the predecessor firm to Principal Real Estate Investors.
INDUSTRIAL: The industrial sector recorded the sharpest repricing over the 12 months to June 2023. According to MSCI, capital value for European industrial property declined by almost one fifth from the previous peak, paring back the gains accumulated over the last two years. Prime net yields have softened across all core markets, driven by Glasgow and Edinburgh (+175bps). However, the quarterly pace of softening has generally slowed considerably, and it is likely to flatten by year-end. Meanwhile, occupier demand remains robust, although its perspectives are weakening as the lagged impact of high interest rates weigh on the economic outlook and global trade. Thus, industrial vacancy rates have risen modestly, but remain very low. Lack of supply in core markets in France, Germany and Spain has constrained take-up and driven continued rental growth.
OFFICE: Since the end of 2022 investors have stepped away from real estate capital markets waiting for assets to reprice. The decline in deals was particularly severe in the office sector since macroeconomic headwinds were compounded by concerns over the rise of remote working. Capital values dropped by 16% on average across Europe over the last 18 months, driven by the UK where borrowing costs have risen more than in the eurozone and the shift towards hybrid working has been more pronounced than in mainland Europe. Nevertheless, office availability in main central business districts remains generally low, sustained by a resilient labour market and a boost in corporate profits over the last two years. Paris CBD remains the tightest market, followed by Luxembourg and Vienna. On the other side, secondary sub-markets saw vacancy rates trending upward as more companies, while downsizing, relocate to more desirable locations.
RESIDENTIAL: The steep home price appreciation seen in the last years and the spike in interest rates occurred over the last 18 months have significantly worsened housing affordability and locked several new buyers out of the market. In the UK for example, mortgage approvals fell by a third in August compared to the same period last year, and the national house price index declined by -4.7% year-on-year in Q3 2023. Meanwhile, housebuilders’ sentiment continues to weaken. The slowdown is common to all European countries, although with different intensity. And while it dents total returns in the short term due to capital value depreciation, it strengthens the long-term attractiveness of the “‘living sector’ for institutional investors amid growing demand for rental solutions (including apartments, built-to-rent, affordable housing student accommodation, and senior living) and sluggish supply.
RETAIL: The retail sector was the only one achieving positive total returns so far this year, driven by low single-digit rental growth, partially offset by a small decline in capital value. This trend was due to a couple of reasons. First, retail yields had already softened significantly during the pandemic, thus could better absorb the increase in base rates and bond yields. Second, a growing number of retailers took advantage of the feeble activity in capital markets to purchase the building they were originally renting, thus putting a floor on values. Third, the return of commuters to city centres and the resurgence of tourism during the summer season have contributed to increased high street footfall and uplift operators’ sentiment. Across the retail sector, out-of-town retail parks is the segment with the brightest prospects as it has adapted to the rise of e-commerce relatively better than high street shops and department stores. These operators turned their performance around by embracing a multichannel sales strategy centred upon easy parking, larger storage, click-and-collect offering and online sales. Thus, European retail parks vacancy rates have continued to decline for eight consecutive quarters to 4.4% as of Q2 2023.
OTHER: Data centres take-ups and new supplies continued to increase in the six months to June 2023, although at a lower rate due to difficulties in securing and delivering new capacity. Vacancy rates across the FLAPD markets decline further and are forecast to reach 11% by the end of 2023, marking the fourth consecutive year of decline.
Healthcare prime yields have softened to an average of 5.3% as of June 2023, but capital flow is expected to remain subdued as the price gap between buyers and sellers is still wide. Additionally, an extended period of lower occupancy rates, high borrowing costs, funding gaps and a shortage of qualified workers have weakened the occupier market. Restructuring and insolvency cases are on the rise.
Student housing total returns were modest but positive in the first half of this year. The sector was not immune from yield softening, although to a lesser degree than most sectors. Meanwhile, the occupier market performed well. Occupancy rates reported by most operators ranged between 95% and 100% in Q3 2023. Thus, rents have increased by mid single-digit over the year prior, but cities with the highest student-to-bed ratio recorded a higher jump.
Investment principles & strategy
We offer clients a wide range of capabilities through our investment platform, and strive to deliver consistent, risk-appropriate performance and strong relative value.
Our investment strategy and research process sit at the heart of our ability to assess relative value globally, both within and across quadrants, and to deliver on investment solutions. Our investment teams rely on our analyses and insights to inform their investment decisions.
A relative value approach to investing
We make all our investment management decisions using a relative value approach. This team-based, time-tested process includes rigorous, in-depth research and focuses on maximising investment returns that match our clients’ risk tolerances and preferences. We base our investment decisions on a combination of bottom-up asset analysis and top-down economic and sector views. In a constantly evolving marketplace, innovation is critical, whether it’s sustainable investing or ‘next-generation’ investment strategies.
Comprehensive market coverage, holistic understanding
Our experience in all four quadrants of the commercial real estate market – public equity, private equity, public debt, and private debt – gives us a holistic understanding of the market. We draw not only from the focused experience of each quadrant team, but also the insights gained from cross-team collaboration.
This helps us make a comprehensive risk-adjusted return assessment, across all quadrants, and enables a tailored approach to investing client capital based on their specific risk/return objectives.
© 2023 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset ManagementSM is a trade name of Principal Global Investors, LLC. Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.