Savills Investment Management has reported that based on historic correlation, real estate equities are signaling an imminent correction in European direct commercial property market. However, while the current sell-off in European listed property shares suggests European property capital growth will fall over the next six months, Savills IM believes equity market investors are over-reacting and that rather than falling, capital growth will simply decelerate.
This is influenced by a number of critical factors. Notably, there is an absence of distressed credit and a limited supply of quality space. This, combined with the current support for the property market from an improving job market, muted inflation and steady economic growth, will provide increased support for occupier markets over the coming year.
Irfan Younus, senior research analyst at Savills IM, commented: “In our view, the recent decline in real estate securities is simply a reflection of negative sentiment. We continue to believe that European commercial property markets are well-supported by economic fundamentals and that while the sell-off in European listed property shares will likely slow European property growth, equity markets shouldn’t expect a fall.
“We anticipate capital growth to decelerate over the coming year, with attractive opportunities to be found in property with bond-like characteristics.”
While investors should expect to see a deceleration in capital growth, given the spread between sovereign bond yields, investors should be well-compensated for property’s risk with the risk premium currently significantly higher than its long-term historic average.
