Aberdeen Property Investors (Aberdeen) believes that the recent credit crunch will hasten the end of the current period of indiscriminate yield compression in Europe. Investment managers will no longer be able to rely on rising property prices across the market to generate the bulk of their returns. Instead the market environment will favour active managers that employ a disciplined process and are far more selective when investing in property from both a regional and sector basis. Furthermore the ability of managers to drive up the rental value of their holdings will be key in generating future returns.
The European property market has benefited in recent years from solid economic growth and relatively low interest rates. The availability of cheap debt combined with general economic expansion, overall employment growth and pension schemes increasing allocations to property has driven up demand and led to record-levels of returns in 2006 of 13.3%. A large proportion of this and, of returns in previous years, was made up of capital appreciation (yield compression). Even before the impact of the subprime crisis it appeared that capital growth would be more limited going forward as economic growth slows. Indeed Aberdeen expects average European property total returns to decrease to more normalised levels in 2007 to around 9.1%.
The resultant re-pricing of risk and increased cost of debt caused by the subprime crisis is likely to restrict property price growth even further. Whilst markets across Europe continue to benefit from huge levels of liquidity from pension funds increasing their exposure to domestic and overseas property; market activity by highly leveraged investors will fall as the costs of borrowing rise. However, on the flipside the credit crunch should help to reduce the development pipeline in the mid to long-term which in turn will limit supply and be positive for supporting rental growth.
In this environment, active management will come to the fore in terms of identifying opportunities across markets and sectors and working existing holdings harder, eg pushing through rental increases. From a regional perspective Aberdeen continues to favour the Nordic region where GDP growth forecasts for 2007-11 continue to be amongst the highest in Europe. The team also believes there are exciting opportunities in eastern European countries which are enjoying strong levels of economic growth.
Within the Nordic region, the office sector remains particularly attractive due to signs of continued strong demand, rising rents and good overall employment growth prospects supporting longer term future rental growth. Elsewhere in Europe, workforces are forecast to shrink over the next 10-15 years leading Aberdeen to prefer the retail sector where demographic factors will have less of an impact. In addition, the retail sector should benefit from strong levels of consumer spending and positive rental growth prospects.
Alessandro Bronda, Head of Investment Strategy at Aberdeen Property Investors commented: “The subprime lending crisis has increased the risk of global growth slowing. However, there continues to be a significant amount of liquidity targeting real estate exposure and a lack of suitable product. The end of the yield compression will mean that active management capabilities such as those of Aberdeen will become more important.”
For more information, please contact:
Alessandro Bronda
Head of Investment Strategy
Phone: +32 476 349 279
alessandro.bronda@aberdeenpropertyinvestors.com
Ubbe Strihagen
International Director
Phone: +46 70 520 33 80
E-mail: ubbe.strihagen@aberdeenpropertyinvestors.com
Charlotte Walsh/ Tom Siveyer, Maitland
Phone: +44 207 379 5151
About Aberdeen
Aberdeen Asset Management PLC is a global investment management group listed on the London Stock Exchange and managing more than €130 billion of assets from offices around the world.
The specialist property division, Aberdeen Property Investors, manages some €13 billion in investments through property funds and management mandates on behalf of its institutional client base. Aberdeen Property Investors has some 500 employees at offices in eleven European countries.
Issued and approved by Aberdeen Asset Managers Limited, on behalf of Aberdeen Property Investors, authorised and regulated by the Financial Services Authority.