Abrdn’s forecasts for returns from European and UK real estate have been increased — as it predicts a deeper “construction crunch” that will limit new supply and heighten rental pressures.
Its outlook has also improved thanks to the “brightening picture” for some offices, which Abrdn no longer sees as a significant drag on overall returns.
The Edinburgh-based global investment company, which manages more than £30 billion of real estate assets, recently upgraded its House View on real estate for a third quarter in a row.
Abrdn’s return forecasts were already positive, and it has made further upgrades “considering on-going market momentum, construction constraints and improving transaction activity.”
The firm said: “Increased liquidity in logistics, residential, retail parks and core offices should give valuers what they have been missing for two years – comparable evidence.”
Anne Breen, Global Head of Real Estate at Abrdn, said: “The year kicked off with a somewhat shaky start for real estate given wobbles in the gilts market.
“However, we are accustomed to short-term volatility and remain convinced the property market correction is over and we have entered a new growth phase – at least for high quality assets.
“Europe and the UK are facing a persistent construction crunch because of high costs and planning permission hurdles. While solving this is key to Europe’s long-term prosperity, and will help to unlock our own long-term ambitions, the reality is in the short term, this should further support property valuations.”
Abrdn manages and administers £511.4 billion worth of assets for clients. Its investments business manages £369.7 billion on behalf of clients — including insurance companies, sovereign wealth funds, independent wealth managers, pension funds, platforms, banks and family offices.
Abrdn sees the potential for double digit returns in some office segments this year, including London’s West End, Paris Central Business District (CBD), Madrid CBD and central Amsterdam. “Low-quality office stock remains under pressure but, for prime offices, tenant demand is strong and rents rising,” said Abrdn.
Even so, at a sector level, Abrdn continues to prefer residential and logistics. Some of its highest conviction calls this year are in European logistics and the build-to-rent sector, which in the UK includes Abrdn’s joint venture with John Lewis Partnership.
Overall, Abrdn’s residential investments broke €10 billion last year.
Breen added: “While we have been underweight offices for a number of years, we have noticed a significant improvement in prospects for the sector and believe there will come a time when investors without an office exposure will underperform.
“Of course, the questions investors will now need to consider are: when does that time come and what does a performing office look like?”
Abrdn is forecasting three-year annualised total returns for European real estate to be around 9%. For UK, its forecasts are slightly lower “as it is a taking longer for the UK’s borrowing costs to fall and the path of interest rate cuts to materialise.”
In the UK, offices have jumped up Abrdn’s sub-sector rankings. London West End Offices, Abrdn’s preferred office sub-segment, have climbed to fifth in the ranking – up from 12th out of 34. Mid Town Offices have risen to 17th from 23rd.
In Europe, Abrdn expects the Netherlands, Spain, Portugal, Denmark and France to be the best performing markets over the next three years. By contrast, the Czech Republic, Switzerland and Poland are expected to underperform.