Real estate investors should focus on income in 2019

Real estate investors should focus on preserving income streams in 2019, while the logistics and unloved retail sectors offer opportunities in Europe and Asia, according to Savills Investment Management.

The international real estate investment manager has outlined key investment themes in its 2019 Outlook report. The report notes that despite the uncertainty of rising interest rates, trade protectionism, the Italian budget and Brexit, reliable indicators continue to signal that developed economies have the stamina to continue growing throughout 2019.

"European real estate markets performed strongly in 2018 and there is scope for the continent’s economy to maintain momentum in 2019,” said Kiran Patel, global CIO and acting global CEO, Savills IM. “But the cycle is clearly at a mature stage and, given a current backdrop that includes political tensions across most European countries and the ongoing uncertainty in the United Kingdom around Brexit, investors might consider focusing on protecting and enhancing income streams.

“There are still highly promising investment opportunities in Europe, particularly in the overlooked retail sector and the logistics sector, which is seeing positive structural changes. In our view, we believe that now is not the time to take major risks, and investing for stable income in good-quality properties in established locations, commensurate with achievable returns, would be a better risk-adjusted profile to adopt.”

Patel continued, “We have seen that Asia is growing stronger than Europe, with better longer-term fundamentals in terms of population growth as well as faster-growing prosperity and urbanization. We have found this is leading to increasing occupier demand, while a growing middle class also drives demand for retail space and logistics via growing e-commerce. With Asian markets at all stages of evolution from emerging to established, many opportunities for core-plus/value-add real estate investing are seen as arising.”

Highlights from the report include:

United Kingdom

Despite Brexit-related uncertainty, the London office market remained healthy in 2018. Low levels of supply and occupiers’ preference for new stock will likely keep rental values stable into 2019. Record levels of employment and a pick-up in real wage growth should stimulate consumer confidence and future retail spending. E-commerce growth continues to fuel occupier activity in the logistics market, where strong take-up levels have kept supply relatively low, putting upwards pressure on rents. Going forward, major infrastructure investments could unlock opportunities for industrial development.

Key picks:

• London office market, particularly multi-let London City office buildings
• Logistics units in the southeast, Big Six (Birmingham, Bristol, Edinburgh, Glasgow, Leeds and Manchester) plus Oxford and Cambridge

Commercial real estate debt

Since the global financial crisis, a stronger and more balanced recovery has allowed the commercial real estate (CRE) market to recover substantially. In Europe, this market is likely to continue to evolve into a more balanced and efficient lending market similar to the U.S., where the banks hold approximately 40 percent of all outstanding CRE debt versus a far greater proportion provided by alternative lenders. The role of alternative lenders in Europe should continue to expand for the foreseeable future, providing much needed diversification from the historically bank-dominated landscape.

Total 2018 lending volumes are set to exceed the £45 billion – £55 billion ($51 billion – $62 billion) seen in each of the previous four years and alternative lenders are taking a growing share of the new origination market. This is likely to continue as new capital enters the space vacated by banks, propelled by investors seeking yield-based income and stable returns in the later part of the market cycle.