The UK property market will be Europe’s best performing in the next five years, according to a research report publish on Thursday.
A debt funding gap of €24bn is estimated for the next three years in the UK, France and Germany, as re-financings of maturing loans are expected to face issues from the decline in capital values and lenders’ reduced risk appetites, said real estate investor AEW.
“As in the post global financial crisis era, this presents an opportunity for equity and debt investors with capital to deploy,” it added.
Despite low unemployment and a successfully managed rebound from Covid lockdowns, AEW’s base case scenario assumes higher bond yields as well as a short and shallow recession in the fourth quarter of 2022 and most of 2023.
Reflecting the heightened uncertainty, AEW’s downside scenario assumes a longer recession and higher-for-longer bond yields.
AEW expects 2022 full-year volumes in the European real estate market to land at €260bn, with €218bn invested in the first three quarters.
This follows the 2021 record of €350bn and reflects the effects on leveraged investors from the doubling in borrowing costs over the last 10 months.
In its relative value analysis, only five markets are considered attractive while 47 are classified as neutral out of the 168 market segments covered.
The UK is ranked most attractive out of 168 covered market segments for the second year in a row on a relative value basis over the next five years, with Benelux second, reflecting an above average share of attractive and neutral markets, AEW said.
Projected returns for all property across Europe during 2023-27 remain positive, although yield widening has pushed forecast returns to 4% a year across all 196 segments, down from 4.7% six months ago, largely due to higher government bond yields pushing up property yields and limiting capital value growth.
Logistics is expected to generate the highest returns of any sector over the next five years at 5.4% per annum as solid rental growth offsets yield widening. Prime shopping centres are in second place with returns of 5.1% per annum on the back of high current yields.