UBS Asset Management’s Real Estate & Private Markets (REPM) business has been investing in real estate for over 85 years, having launched its first real estate fund as early as 1938.
REPM actively manages investments of around $107.6bn* globally and regionally within Asia Pacific, Europe and the US, making it one of the largest asset managers in real assets worldwide. Our capabilities reach across the risk/return spectrum, ranging from core to value-add and opportunistic strategies. We offer direct real estate, infrastructure equity and debt, and food and agriculture investments as well as indirect exposure to leading real estate, infrastructure, private equity and private credit managers. Investors can access our diverse product range across open- and closed-ended private funds, investment trusts, listed funds, REITs and bespoke separately managed accounts.
* Assets under management stated on gross asset values basis, reflecting values as at 30 June 2024, where available.
Sector forecasts
GLOBAL:
Global real estate performance in 2023 was set against a weak economic backdrop of prolonged high inflation, sharp rises in interest rates and looming fears of recession. As interest rates looked to be peaking, they were having their desired impact of curbing inflation from multi-decade highs. Throughout 2023, global real estate transaction activity remained subdued as the missmatch in price expectations between buyers and sellers and uncertainty over the outlook continued to hold back deals. In the first half of 2024, according to MSCI, investment volumes remained well below their post-pandemic peak, and capital values showed some further declines. We think that the bulk of the correction in capital values had occurred on entering 2024 and that performance will improve in the second half of the year as interest rates get cut and start to feed through to property markets, and they begin to normalise. We are most cautious on offices, which are seeing a strong bifurcation in terms of quality and location as the shift towards hybrid working sees ongoing structural change in the market. Sectors that look set to outperform include life sciences and data centers, due to strong fundamental occupier demand, as well as hotels and hospitality, benefiting from wider travel activity in the wake of the pandemic and despite rising costs, and are also set to benefit from growth in the economy.
INDUSTRIAL:
The sector continues to have tailwinds in the leasing market, albeit supply continues to catch up with demand, which is normalising around pre-COVID-19 levels. Vacancy rates are largely under control, around 3.1% in Germany as a whole and 5.2% in the UK as two examples. Therefore, rents are still under pressure but rental growth is normalising around 2-3% pa. The sector has been relatively sheltered from the interest rate increases, thanks to leasing market demand, but capital values are nevertheless down by ~5-10% from year-end 2022 in, eg, some central European cities, Copenhagen, Frankfurt and Madrid to name but a few. The sector displays a ‘return to normal’ trend, with income return being an important share of returns going forward.
OFFICE:
The bifurcation in office markets continues as tenants shun lowquality offices for high-quality, ESG-conforming space. Net demand is weak, and at record lows in some markets, such as Germany where the annual net absorption of office space in the Big-5 cities was negative by 230,000 in 1Q24. But gross demand (take-up) is still relatively healthy in most markets, eg, hitting nearly 9m sq ft in central London in the 12 months ending in March 2024. This gross demand is squarely focused on the best assets. Consequently, prime rents are rising, up 13% in Madrid, 11% in West End and 7% in Paris CBD from year-end 2022. Lower-quality offices are suffering though, seeing ~28% vacancy in London as an example. Capital values have fallen across all asset qualities, with current yields the closest they’ve been to risk-adjusted values for the last two years. Consequently, in market slices with good leasing fundamentals, investors can again find investment opportunities that offer attractive risk-adjusted returns over the mid to long term.
LIFE SCIENCES:
There has been a surge in investor interest in this space since the pandemic, but the sector is still in its infant stages in Europe. The US remains the dominant market for venture capital (VC) funding going into new companies, but funds have been increasingly looking to Europe for better value investments. In the UK, this has already translated into a sharp increase in occupational demand around the Golden Triangle of Oxford, Cambridge and London. In Continental Europe, Berlin and Paris are at the forefront in terms of leasing demand and the consequential interest from companies in the sector to secure facilities for R&D and manufacturing processes. Structural trends in the life sciences sector – this includes mRNA vaccines, homeshoring and neurotechnology – are generally pushing for more space which currently is not on offer, leading to value-add and opportunistic opportunities in building new facilities.
RETAIL:
A slow but noticeable recovery has started in leasing markets. High street rents in Europe are generally flat since year-end 2022 but in occasional markets we can see rental growth since then, eg, Manchester (~20%), Warsaw (~15%) and Berlin, Frankfurt and Lisbon (~4% each). Many markets had already seen capital value corrections during the pandemic, with the yield correction after the interest rate shock being less prominent than in many other sectors. Prime yields currently stand at 4-5% in key eurozone markets (eg, Amsterdam, Madrid, Berlin, Paris) with some yield compression expected if interest rates do indeed trend downwards. UK retail is seeing its recovery mainly in retail warehouses, with the capital value growth in shopping centres still struggling.
MULTIFAMILY:
The long-term structural drivers of the multifamily sector in Europe remain firmly in place – with urban population growth coinciding with a chronic lack of new housing stock in many markets. This is placing significant upward pressure on rents, but with household incomes coming under pressure several governments have intervened to limit rental growth, thereby hampering supply. Yields in the sector have not moved as drastically as in other sectors, given the long-term, low-risk investment strategies that dominate investors’ approaches to it. However, with yields in the sector at low levels, they have become directly exposed to rising risk-free rates and leverage costs and some outward movements have been reported. We see the risk of this continuing, especially given how difficult it can be to raise rents in the sector. We generally see better value in the student accommodation sector.
COMPLIANCE STATEMENT
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