Henderson Global Investors: European property - the investment timing paradox (EU)

In its latest 'THINK' report on the European property market, Henderson Global Investors analyzes the investment timing paradox that property investors are faced with.

Evidence suggests that investors and lenders are still operating in risk aversion mode, almost exclusively focusing on core assets. Henderson believes that property investors should consider moving up the risk curve to benefit from the current risk premium and play the next rental cycle. Most importantly investors are rewarded with a sizeable risk premium for exposure outside the prime segment.

The main case for its argument is summarized below:

  • We have come along way since the economic crisis and economic data now points to a muted recovery of about 2.5% per annum average GDP growth over the next three years across the core European countries.
  • At least for prime assets, the rental recovery is in sight and should start playing a role in investment appraisals. Occupier markets typically lag economic indicators. Indeed, past recessions show it can take two to three years from the low point of economic decline until rents find the bottom as well. This suggests that European property markets will begin to see rental growth at some time between mid-2011- mid 2012. In fact, stabilization could come earlier than this with the absence of a construction boom.
  • Provided over renting is not a problem, those with leases expiring around 2014 and 2015 should potentially benefit from re-letting in a climate of accelerating rental growth. Additionally, periods of accelerating rental uplifts usually attract speculative investors that specifically target short unexpired terms or vacancies.
  • In particular, as we are experiencing in this cycle, the low levels of new supply support a technical rental value increase, even during what could be a slow growth environment.

Alice Breheny, Head of Research for Henderson Global Investors said: "Typically, bidding is most prevalent at the peak of the rental cycle, when the market is ex-growth: Investors tend to look backwards at the growth trend and then extrapolate them into the future. In contrast, by moving up the risk curve ahead of the pack around the occupier market trough, investors can buy into the full rental recovery.

"Based on current economic forecasts which suggest that the recovery will continue and bond yields will soften, we believe that property investors should consider moving up the risk curve to benefit from the current risk premium and play the next rental cycle."

Source: Henderson Global Investors

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