Property markets in the euro zone are the most fairly priced globally, according to Aberdeen Asset Management’s first quarter 2016 Global Property Strategy report, released in March along with regional outlook reports for Asia Pacific, Europe, the Nordics, North America and the United Kingdom. This is at odds with Hong Kong, which Aberdeen’s global pricing indicator suggests is the most overpriced real estate market in the world.
Macro fundamentals have been less of an issue than concerns over risk given the tumultuous start to 2016 endured by global financial markets, notes the report, with risk asset prices actually dropping while “core economic momentum appears to be fairly strong across most G7 economies.” This is somewhat of a reversal to recent years where risk-asset prices were rising because of exceedingly loose monetary policy and “economic momentum was weak and slack evident,” states the report.
North America
Fundamentals in key markets and positive inflows continue to support commercial real estate in the United States, but it appears late-cycle pricing risk is higher. Supply across most sectors is now a key risk that should be monitored closely. The retail and industrial sectors are more attractively priced than the office sector, and should outperform the office sector. And, while the U.S. multifamily sector still appears attractive, NOI growth “at the property level could weaken because of the supply-side response.”
Europe
Given the extremely high spread between government bond yields and prime property in Europe, European real estate investment is relatively attractive and should remain so for the foreseeable future. And, despite ongoing market uncertainty overall in the region, the defensive nature of prime property continues to hold great value for investors. Aberdeen expects this sentiment to continue, and for yields to be pushed down even further in the near term. The firm also expects European real estate to generate “exciting” returns in the near to medium term.
Overall, the U.K. market is one of the most overpriced globally, even though occupier market fundamentals are improving and relative values make the U.K. market exceedingly attractive to yield-hungry investors. “Wider investment market uncertainty affected real estate flows during the last two quarters of 2015: there was a fall in institutional net investment, while retail flows eased significantly,” states the report, which also indicates long-term investors should adopt low-risk positions with their U.K. portfolios.
Asia Pacific
Although Hong Kong’s property market has seen strong price increases in recent years, “even an optimistic outlook for rental growth struggles to justify current valuations,” states the report. Australia and Singapore’s office markets also seem overpriced, but less so than in Hong Kong. On a relative basis, industrial and retail markets in the Asia Pacific region are more attractive. However, investors should be cautious of a potential slowdown in retail deal volumes, given current pricing leaves little flexibility for downside risk. And, while valuations in Japan look strained, Aberdeen expects “the extremely low returns available from fixed-income to drive further price rises for real estate and to support exciting returns in the near term.”
Jennifer Molloy is senior editor of Institutional Real Estate Asia Pacific.
