DekaBank's real estate team has given a mixed prognosis for European property in 2012, and an overall fall in returns of 2.6%. It suggested investors take a diversified fund approach also encompassing US assets.
DekaBank’s real estate team has given a mixed prognosis for European property in 2012, and an overall fall in returns of 2.6%. It suggested investors take a diversified fund approach also encompassing US assets.
Overall in Europe, DekaBank warns, total proceeds from European real estate could fall by 2.6% on average in 2012, but the average return from 2012 to 2016 will be 2.9%.
Ulrich Kater (pictured), chief economist at Germany’s largest provider of open real estate funds, said the 2012 figure was “clearly below those of 2008 and 2009, as total returns after the Lehman Brothers collapse fell by 12% and 7% respectively.”
But Matthias Danne, head of real estate at the bank which has over €22bn in the asset class, said property still had a role to play in a diversified portfolio, not least because of the meagre returns from some other classes, and uncertain outlook for others.
However, he noted the work-out of the eurozone debt crisis, poor rental demand and more challenging conditions for financing would limit activity in Europe’s property market in 2012.
Presenting DekaBank’s annual real estate outlook this morning, Danne added DekaBank expects lowered rent expectations and difficult financing conditions for sectors except for high-grade, core property.
DekaBank expects total returns from European property overall to start turning positive only from 2013. A poor outlook for peripheral markets will remain until 2016.
As in so many other asset classes, Germany will remain Europe’s safe harbour for property, while France will also be relatively robust.
Four of the five most attractive areas for offices in Europe are in Germany, according to DekaBank. In terms of income and rental growth, only Lyon in France is better than Stuttgart, Hamburg, Cologne and Berlin.
The outlook for southern European nations such as Spain and Italy looks “significantly more pessimistic”, said Danne.
Kater said persistent differences in GDPs of north- and southern Europe in the coming year would exert an effect on their respective property markets.
In Germany, for example, GDP in 2012 should rise 0.1%, and then by 1.6% the next year. DekaBank foresees stagnation in German office markets in 2012, but then mild average annual rises of 2.5% from 2013 to 2016.
“The robust employment market and low levels of new construction volumes in most markets should stabilise the German office markets,” said Danne.
In Spain, by contrast, the bank’s analysts expect 0.4% GDP contraction this year, then recovery of 1.2% in 2013. Office rentals there should fall 4.5% in 2012, and further by 2% in 2013. Only in 2014 will the Spanish office market grow.
DekaBank said, however, overall prices for ‘core’ properties should remain strong, because of risk aversion among investors, low interest rates, and the imponderable situation of other asset classes.
Danne also recommended exposure to the US, which should recover more robustly.
DekaBank expects this year to bring 3.5% total returns from US property. Cities built on high technology and commodities – such as San Francisco, Boston, Dallas und Seattle – should fare well.
In Latin America, this theme translates to allocating in Mexiko City and Santiago.
Asia is also attractive, although the dependency on exports of countries such as South Korea and Japan weigh down on office space in their capital cities in the short term. Tokyo offices may, however, aleready have reached a bottom, DekaBank said.
“Precisely in the current market climate much speaks in favour of investment in well-diversified real estate funds”, said Danne.