Abrdn has raised the outlook for European real estate thanks in large part to the “construction crunch” in the region, which will limit new supply and heighten rental pressures.
The global investment company recently upgraded its house view on real estate for a third quarter in a row. Its outlook has further improved thanks to the brightening picture for some office stock.
The company said capital value declines for the office sector have become less severe and it 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.
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.
Abrdn is forecasting three-year annualised total returns for European real estate to be around 9%. For the UK, its forecasts are still healthy but slightly lower, as it is taking longer for the UK’s borrowing costs to fall and the “path of interest rate cuts to materialise”.
The company expects the Netherlands, Spain, Portugal, Denmark and France to be the best performing European markets over the next three years. By contrast, the Czech Republic, Switzerland and Poland are expected to underperform.
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.
“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?”
