Go to Europe, real estate investors told

Go to Europe, real estate investors told

Credit Suisse urges diverse holdings

A view of London's Canary Wharf earlier this month. (Reuters photo)
A view of London's Canary Wharf earlier this month. (Reuters photo)

Investors have shown greater interest in having real estate make up more of their portfolios in recent years, with international diversification of this asset class another rising trend, a bank executive said yesterday.

Real estate is a broad spectrum that gives investors a broad choice of strategies depending on their needs, ranging from funds and stocks to real estate investment trusts (REITs), customised mandates and club structures, Zoltan Szelyes, head of market research for global real estate at Credit Suisse Asset Management, told the Bangkok Post.

Credit Suisse Asset Management recommends that Thai investors have Europe overweight for asset allocation in global real estate as the market there is in a favourable position according to the cycle of returns.

Europe has seen an eventful decade in terms of economic performance, shifts in the political landscape, and turns in the real estate markets. Economies and real estate markets there have recovered since mid-2013 albeit with significant differences among countries.

With parties in the "political middle" following election victory in this year's first half in France and the Netherlands together with a solid majority support for Angela Merkel in Germany, political risks in Europe seem to be receding.

"We anticipate that economies in the euro zone will continue to strengthen in 2017," Mr Szelyes said.

"Countries like Spain, the Netherlands or Ireland are expected to record above-average growth, while the German economy remains robust as the unemployment rate is at the lowest level since German reunification. Due to the uncertainties emanating from Brexit, UK growth is likely to be weaker but still at a level of above 1%," he said.

As prices continue to recover, income yields in commercial and residential real estate properties remain in decline.

Typical core investments, which includes spending on fully leased properties at central locations in the biggest European cities, provide net income yields of between 3% and 4%.

On the other hand, construction activity is still limited in many office and retail real estate markets like Spain, the Netherlands, Ireland and Germany.

With the economy improving and demand picking up, Credit Suisse Asset Management sees the potential for more value-added strategies to generate higher risk-adjusted returns.

These active real estate strategies include investments in buildings that need to lease out vacancies or engage in refurbishments or repositioning, or investments in development or redevelopment projects.

"Such strategies are illiquid during the life of the investments, and investors need to have a time horizon of five to 10 years as business plans need to be executed, and the buildings are sold towards the end of the life of a fund focusing on such an investment strategy," Mr Szelyes said.

"But such investments provide a typical return pickup compared to core investments and are, in our view, appropriate in the current environment of a more solid European economy," he added.

He said a pan-European investment strategy would make the most sense as it combines investments in the eurozone and the UK.

The selected themes are investments in the Dutch, Irish or Spanish office markets, where Mr Szelyes believes there is scope for lower vacancy rates and substantially higher rents.

For Germany, this would combine commercial real estate exposure with investments in development projects for residential sale, as vacancy rates in German residential markets are marginal.

The UK remains a crucial part of the firm's European allocation despite the risks stemming from Brexit, Mr Szelyes said.

"However, we would rather focus on the regional markets as valuations here are the most compelling in Europe and the supply risk is lower than in London," he said.

A pan-European investment strategy would win out as the valuation and rental cycle differs by country and segment, he said.

As such, a value-added investment manager can put together a portfolio influenced by different factors that reduces risk by means of diversification while still targeting higher returns, the global real estate specialist added.

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