The UK is leading a global recovery in the property sector due to new-found political stability and asset repricing, according to Abrdn.
The asset manager argues the real estate sector has now mostly repriced following the end of the era of cheap money.
Following the general election result, Abrdn says the UK’s perception among investors has plausibly shifted to being a “bastion of relative calm” amid a more complex global political environment.
Rolling annual returns for UK real estate are almost back to positive territory, while globally they remain down 5%, according to MSCI data to Q1 2024.
Abrdn has forecasted UK property total returns to average 8% per year over the next three years.
As a result, the firm has upgraded its investment view on real estate from underweight to neutral, while it is overweight on the residential, industrials and retail sub-sectors.
Meanwhile, Asia Pacific real estate is lagging the global cycle, due to China’s continued property woes and the Bank of Japan raising interest rates at a time when most developed markets are looking to cut.
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The average yield on prime property in the UK and Europe is now at 5.7%, which Abrdn says represents an “appealing cashflow” when compared to yields on Eurozone and UK government bonds, which are currently at 3.1% and 4.1% respectively.
“We believe this real estate cycle is very different to previous ones, as rental income from property has not been challenged in the way it was before,” Anne Breen, global head of real estate at Abrdn, said.
“That means the recovery for future-fit buildings should be faster – boosted by lack of high-quality supply.
“However, not all sectors are made equal. We particularly like residential, because of supply-demand imbalances; industrials and logistics – due to the need for modern warehousing to support global and local distribution; and some areas of retail that have benefitted from changes to the way we shop since the pandemic.
“We are more cautious than most on offices. In our view, a small proportion of the market (i.e. prime central locations) will do very well, but for a large part they face higher tenant churn and more capital expenditure requirements – with large pools of global capital looking to reduce overall exposure to the sector. We therefore advocate a very cautious and selective approach.”
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