BNP Paribas Wealth Management publishes report on international real estate

Given the significant reduction in real estate capitalisation rates over the last five years, coupled with the imminent prospect of an interest rate hike, a wave of uncertainty is sweeping over both commercial and residential property markets. Nevertheless, a number of real estate markets performed well during 2017. Overall, commercial property markets are slowly converging towards a balance between supply and demand, resulting in lower vacancy rates and higher rents.

“In this situation it makes more sense to hold a portfolio of real estate assets spread across different segments and countries in order to diversify revenue rather than trying to outperform the traditional asset classes,“ underlines Pol Tansens, Head of Real Estate Investment Strategy at BNP Paribas Wealth Management, explaining: “Our advice to investors looking for higher yields (an Internal Rate of Return of at least 10%) would be to identify added value opportunities. For example, portfolios of real estate assets due for restructuring can be acquired at a price lower than the cost of replacement, thus offering upside potential. This value-creation strategy does however imply a relatively long investment horizon, often up to 8-10 years.”

BREXIT NOT SO OFF-PUTTING?

Last year ended with good returns in the UK. Hong Kong investors remained strongly involved in the London commercial property market, completing during 2017 two of the biggest real estate deals ever done in the United Kingdom.

CO-WORKING THE FUTURE OF COMMERCIAL REAL ESTATE?

Co-working is a new phenomenon based on the principle of sharing a workspace among different companies. This new way of working is becoming more widespread all over the world and the major real estate players such as Blackstone, Carlyle and British Land have jumped on the bandwagon.

“The European real estate markets are still able to provide good sources of value in 2018. As far as office space in Germany is concerned, Berlin remains in pole position with overall profitability – including rental income and price variation – expected to be close to 20%, driven by strong growth in rents and new falls in interest rates. In France, the entire office property market in Lyon could achieve a performance close to 13% due to a delayed effect in the wider spread of the recent reduction in ‘prime’ rates. In the logistics segment, the best returns are likely to be seen in southern Europe, especially Milan (21%) and Madrid (14%)”, predicts Richard Malle, Global Head of Research at BNP Paribas Real Estate.

INVESTORS STILL ATTRACTED TO THE LISTED SECTOR

The combination of lower long-term bond yields and the drop in real estate capitalisation rates have made Real Estate Investment Trusts (REITs) very popular in recent years, especially since these listed property companies offer investors access to more international real estate markets.

RESIDENTIAL REAL ESTATE: FOCUS BY REGION

• Europe: The main European housing markets have strengthened over the last five years due to a continuous fall in interest rates. At the same time, a number of real estate markets that were seriously affected by the credit and real estate crises in 2007-2010 – Spain, Ireland and the Netherlands – have now recovered. France has seen considerable gains in some cities, including Paris (up 5.8% in 2017). The United Kingdom, especially London, is a special case. The luxury residential real estate markets have been through a difficult period in the last three years, which has brought down real estate values.

• Asia: The housing markets are fragmented and expensive. In Shanghai, for example, the ‘affordable’ housing market and the luxury segment have fallen by 47% and 80% respectively on an annual basis. This is a striking contrast with the buying frenzy of previous years. Meanwhile, as housing regulations in China’s major cities gradually get tougher, potential buyers are starting to look at opportunities in more medium-sized towns. At the same time, buying and selling have continued in Hong Kong, which has the highest prices in the world.

• United States: Most of the housing markets have continued to gain value – 6.4% on average, 9.1% in San Francisco, 5.7% in New York – and have performed better than expected. In some cities in the west of the United States renting is a better deal than buying.

WHAT CAN WE EXPECT TO SEE IN THE FUTURE?

“We think that the period of low real estate capitalisation rates is to a certain extent a thing of the past – de facto limiting returns on capital – without there being any significant price correction,” explained Pol Tansens. “This means that today it’s a good idea to invest in different regions of the world in order to diversify one’s sources of revenue rather than looking to obtain remarkable returns.”

Discover the report

About BNP Paribas Wealth Management

BNP Paribas Wealth Management is a leading global private bank and the largest private bank in the Eurozone. Present in three hubs in Europe, Asia and the US, over 6,800 professionals provide a private investor clientele with solutions for optimising and managing their assets. The bank has €364 billion worth of assets under management (as at 31 December 2017) and was awarded “Best Private Bank in Europe, in Asia and in the Western United States” in 2017.