UBS Asset Management (UK) Ltd (Real Estate)

2018 Top 100 Real Estate ranking: 8

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UBS Asset Management’s Real Estate & Private Markets (REPM) business has been investing in real estate for 75 years, having launched its first real estate fund as early as 1943. Since then, the business has grown steadily, expanding the universe and scope of its real estate investments and adopting a truly diversified business model. On an assets under management basis, the business is one of the leading global real estate investment managers today.

REPM’s capabilities include core, value add and increasingly opportunistic strategies on a global, regional and country basis. These are offered through open- and closed-end private (unlisted) funds, fund of funds, individually managed (separate) accounts, REITs and publicly traded real estate securities globally. The business actively manages direct investments in the hotel, industrial, multi-family/residential, office and retail real estate sectors, as well as in farmland in the US – a business that specialises in the acquisition, management and disposition of agricultural real estate investments.

Sector forecasts

Industrial: E-retailing has been a major factor in European logistics in recent years. However, a major part of Europe’s logistics industry is manufacturing related and thus business-to-business (BtoB) and not business to-consumer (BtoC). BtoB logistics choses locations close to assembly lines which are often not in dense agglomeration areas. Land availability for BtoB operations is less scarce than for BtoC operations which require proximity to the end consumer. Consequently, BtoB logistics offer less rental growth opportunities than BtoC. With a slightly weaker outlook for manufacturing and exports, real estate investment in BtoB logistics relies mostly on the current income return with relatively low potential for income growth. With yields at historic low levels and low rental growth prospects in the BtoB segment, this real estate sub segment may have a higher exposure to outward yield movements once the ultra-low bond rate environment comes to an end.

Office: An improving demand outlook supports positive rental growth in nearly all the Eurozone markets in 2018 and is expected to continue in 2019. Positive rental growth is being supported on the supply side by low speculative development across the majority of key Western European office markets. Availability of good quality space in central locations is already very constrained in many markets, which is generating positive momentum for prime rental growth. Whilst the outlook for prime and core is generally positive, the availability of secondary grade space in non-central areas has remained much higher which will continue to polarise performance between the different segments. In case of an uncoordinated Brexit office yields in the UK are forecast to ease out a bit to reflect the heightened uncertainty and weaker occupier market fundamentals. Even though monetary policy in the Eurozone is tightening slightly office yields will continue to be supported by the low interest rate environment. However, increasing spreads between Eurozone bonds may also impact spreads in the real estate market which have narrowed over the last few years.

Retail: The retail sector in Europe has been undergoing significant structural change in recent years and this is expected to continue in the short to medium term. The development of online retailing is continuing at pace, particularly in northern Europe but also increasingly in southern Europe. Online retailing is starting to negatively impact smaller city centres via reduced levels of demand and increased vacancy. Retail centre dominance within its catchment area will be vital to locate outperformance within the retail segments. Keeping an eye on the supply-demand balance in established retail locations will also help to identify asset management opportunities of well located, dated retail stock suitable for repositioning.

Global: The resilient appeal of global real estate is driven by a number of factors: low, albeit rising bond yields; the hunt for steady income; the importance of asset diversification; and a need for stability. Unconventional monetary policies in the form of quantitative easing and ultra-low interest rates have, in recent years, boosted the relative appeal of the asset class, while the consequential increase in capital flows has caused a surge in transactions. Volumes are now down from their peak but remain in line with long-run averages. This continued strength reflects a reluctance to let go of assets given uncertainty as to how to re-allocate capital attractively. Many markets present a price gap between buyers and sellers, with owners of real estate, even with leverage, generally under no pressure to sell while buyers are not willing to pay ever higher prices given the interest rate outlook.

Total returns globally continue to reduce as a result of reduced yield compression and capital value growth. Construction is starting to pick up, but broadly the supply side response has been muted this cycle, particularly in Europe. In the best locations, this has meant good levels of rental growth, meaning returns are not driven primarily by income. Differentiation in projected total return between markets and sectors is narrowing as the cycle extends. Income returns tend to be quite stable over time both within and across markets, while capital growth can vary tremendously depending on a market’s stage in the cycle.

Historically, rising interest rates have coincided with strengthening property returns, thanks to an improving economy and rising rents. This time is different: property returns are slowing as rates rise because a period of exceptional capital value growth driven by ultra-low interest rates and excess liquidity has come to an end. Nevertheless, global real estate remains attractive relative to other asset classes and provides the income and low volatility many investors desire. Lower leverage and less exuberant pricing for lower quality real estate also means the asset class is less at risk than in the last cycle. Returns have certainly reduced but remain in line with the long-term returns one should expect from institutional property.

This publication is not to be construed as a solicitation of an offer to buy or sell any securities or other financial instruments relating to UBS AG or its affiliates in Switzerland, the United States or any other jurisdiction. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in this document have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice. Please note that past performance is not a guide to the future. With investment in real estate (via direct investment, closed- or open-end funds) the underlying assets are illiquid, and valuation is a matter of judgment by a valuer. The value of investments and the income from them may go down as well as up and investors may not get back the original amount invested. Any market or investment views expressed are not intended to be investment research. The document has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. A number of the comments in this document are considered forward-looking statements. Actual future results, however, may vary materially. The opinions expressed are a reflection of UBS Asset Management’s best judgment at the time this document is compiled and any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise is disclaimed. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class, markets generally, nor are they intended to predict the future performance of any UBS Asset Management account, portfolio or fund. Source for all data/charts, if not stated otherwise: UBS Asset Management, Real Estate & Private Markets. The views expressed are as of August 2017 and are a general guide to the views of UBS Asset Management, Real Estate & Private Markets. All information as at September 2017 unless stated otherwise. Approved for global use. © UBS 2017 The key symbol and UBS are among the registered and unregistered trademarks of UBS. Other marks may be trademarks of their respective owners. All rights reserved.

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Real Estate & Private Markets
5 Broadgate
United Kingdom
Eoin Bastible Tel. +44-20-7901 5204
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