UK real estate returns set to outperform European average

UK real estate will offer investors risk-adjusted returns ahead of the European average as many parts of the asset class bounce back from the bottom, according to asset manager DWS. [caption id="attachment_1218806" align="alignright" width="250"] Simon Wallace[/caption] In its European Strategic Outlook report, the firm evaluated challenges the UK real estate market had faced over the past year, including a slowing economy and elevated interest rates, which dampened occupier and investor confidence. Simon Wallace, global co-head of real estate research at DWS, said: “This has been very much a capital markets-led downturn and we are now expecting to see more money targeting the real estate sector. We expect to see more liquidity. “We strongly believe that the price correction for prime real estate assets in Europe is now largely over. They’ve fallen 20% from their peak in mid-2022 and now we think the correction for good quality prime real estate is done.” Looking ahead, DWS expects rates in Europe to stay elevated for longer, but noted potential cuts could begin in May. Wallace said: “Over the next five years, we’re expecting to see on average double-digit annual returns across good quality prime real estate in most of the European markets. There will be markets which we expect to outperform that average, including London, Paris, Amsterdam and Warsaw. “We will forecast that double-digit returns are there until 2028.” Pick of the bunch DWS has marked logistics, residential and offices as its picks for investments this year. Ruben Bos, head of European strategy for real estate, said: “I think overall the UK is very attractive relative to other markets, thanks to the higher starting yields, big price corrections and solid fundamentals. “We think that liquidity returns to the UK first, with logistics remaining a long-term out-performer. It’s heavily repriced though, so the window of investing here will be the shortest.” According to DWS, UK logistics is poised to offer the best opportunities for outperformance in urban and last-hour locations, where demand drivers are supportive and supply remains tight. In addition, redeveloping ageing stock into modern, energy-efficient logistics in the UK’s largest cities is forecast to capture rental uplift and higher returns. Elsewhere, DWS continues to have a positive call on multi-family property, but noted that operational residential real estate, such as student housing and co-living, could also offer attractive risk-adjusted returns. In the meantime, the UK’s build-to-rent sector, which proved relatively resilient over 2023, is expected to be supported by further rental growth on the back of the supply shortage in many major cities. Bos said: “Residential stands out. It’s been resilient to downturns and still has very low vacancy, with future supply unlikely to meet demand. Across the European markets, we typically prefer the fast-growing cities like London, Copenhagen and Amsterdam. Also, some German cities offer very good value today.” Turning to offices, the sector continues to face headwinds and is proving most exposed to current market challenges. That said, DWS favours investment into the refurbishment of secondary office stock into next-generation workspace in London’s submarkets, such as the West End and City. Outside of the CBD, but still within London, DWS favours investment into an office-to-resi conversion amid a chronic housing shortage, alongside sharper falls in secondary office values. Lastly, DWS noted that retail has been the most resilient in terms of price correction after facing headwinds during the Covid pandemic. Bos said: “Again, there might be really good selective opportunities here, but it really requires a specialist.” To send feedback, e-mail evelina.grecenko@eg.co.uk or tweet @Gre_Eve or @EGPropertyNews