Credit: BloombergSimon Wallace, DWS: “Investment activity is on the rise”
Global Co-Head of Real Estate Research at DWS, Simon Wallace, defends “the sick man of Europe”, expecting above average returns
July 30, 2024Real Estate
Written by Helen Richards
Simon Wallace sat down with GRI Club ahead of Europe GRI 2024, to offer his exclusive insights into the current real estate market, answering the questions we all want the answers to. When will transaction volumes pick up, and where are the opportunities amid bid-ask spreads, distress, pricing volatility, and political uncertainty?
DWS is one of the world's leading asset managers with €933 billion of assets under management. As Global Co-Head of Real Estate Research, Simon shared his expert perspectives, including why “the sick man of Europe”, in fact, promises above average returns, and how stability amid the new UK Labour government promises to boost London’s already high appeal to investors, while quite the opposite is occurring in post-election France.
Meanwhile, Simon reveals data centres as the alternative asset class to watch, as well as the impending diversification of the real estate industry with an array of niche sectors emerging, including self-storage, cold storage, life science, medical office, and battery storage, to name a few.
Join Simon and other leading market players at Europe GRI 2024.
How would you describe the current European real estate scenario?
“Looking back on the first six months of this year, it would be easy to conclude that 2024 has so far been something of a disappointment. Having gone into the year with the promise of rate cuts and recovery, it’s true to say that so far there have been few signs of a material improvement in capital market conditions.
But while it’s certainly true that the first half has been slow, this should have come as no surprise. We were never expecting the market to burst back into life – why would it? Previous recoveries have taught us that it will take time for investment activity to gain momentum.
However, with repricing, rate cuts and rent growth, this has all the hallmarks of being an exceptional vintage year to invest in European real estate. For those investors ready and able to deploy capital, we strongly believe that today offers a unique opportunity to gain access to stock that is often either unavailable or prohibitively priced during other phases of the cycle.”
Are we starting to see more certainty around pricing, or does the stalemate continue?
“We’ve seen competitive bidding making a comeback and investment activity on the rise. This has really helped to steady the ship for the yields of top-notch assets in the most liquid markets. Remember how prime yields were growing by 25 basis points every quarter in 2023? Well, that’s almost down to zero now!
And let’s not forget about the occupier fundamentals - they’re still going strong. Despite starting the year with the shadow of a recession looming over us, both the Eurozone and the UK have managed to bounce back with economic growth. Plus, with vacancy rates in most sectors at or even below the average levels we’re used to, rents have kept on climbing, especially at the prime end of the market.”
What are the key risks driving investor sentiment currently?
“Being an excellent vintage does not mean a market without risks, and we should stress that the coming few years will not be easy. It will take time for liquidity to return to the market, and financing is also expected to remain challenging well into the second half of the decade. History suggests that this is unlikely to be enough to prevent recovery, particularly for prime assets, but it may be one of the factors holding back transaction activity over the coming years.”
How do you see the next 12 months playing out? When will transactions pick up?
“Transaction volumes are already starting to pick up. We saw early evidence of this during the second quarter, and we would expect this to continue through the rest of the year. Again, this doesn’t mean we’re expecting a rebound in activity back towards previous highs. It will very likely take years for the market to see the level of transactions recorded during the highs of 2021.”
This is the year of elections, the most recent being in the UK and France. How do you see each of these impacting the real estate market?
“In the short term, the political stability following Labour’s win is likely to enhance the attractiveness of UK real estate to international investors, especially given the growing uncertainty in other parts of the world. This stability, if coupled with economic growth, could boost investor confidence, improve liquidity, and support price recovery in the UK market.
London’s real estate market, already viewed positively by DWS, is expected to benefit from the election result. A more stable relationship with the EU could support London’s office market, while more welcoming visa rules may also benefit the residential sector, particularly student.
Labour’s pledge to deliver 1.5 million houses over the next Parliament, through changes to planning policies and new town developments, could impact the private rental sector. However, the UK residential market is currently undersupplied, and therefore we see few risks of oversupply.
The recent French election has created a climate of uncertainty that could impact real estate investment volumes, particularly from overseas sources.
Despite this, the Paris office market remains robust with low vacancy rates and constrained development. The election results are unlikely to significantly alter these dynamics. However, long-term political instability could undermine the confidence of international occupiers in expanding their presence in Central Paris.
The outlook for the logistics sector also remains positive despite the elections. Low vacancy rates and constrained development activity continue to support this sector.
Overall, the impact of the French election on real estate is nuanced and will depend on future political and economic developments.”
Simon Wallace sat down with GRI Club ahead of Europe GRI 2024, to offer his exclusive insights into the current real estate market, answering the questions we all want the answers to. When will transaction volumes pick up, and where are the opportunities amid bid-ask spreads, distress, pricing volatility, and political uncertainty?
DWS is one of the world's leading asset managers with €933 billion of assets under management. As Global Co-Head of Real Estate Research, Simon shared his expert perspectives, including why “the sick man of Europe”, in fact, promises above average returns, and how stability amid the new UK Labour government promises to boost London’s already high appeal to investors, while quite the opposite is occurring in post-election France.
Meanwhile, Simon reveals data centres as the alternative asset class to watch, as well as the impending diversification of the real estate industry with an array of niche sectors emerging, including self-storage, cold storage, life science, medical office, and battery storage, to name a few.
Join Simon and other leading market players at Europe GRI 2024.
How would you describe the current European real estate scenario?
“Looking back on the first six months of this year, it would be easy to conclude that 2024 has so far been something of a disappointment. Having gone into the year with the promise of rate cuts and recovery, it’s true to say that so far there have been few signs of a material improvement in capital market conditions.
But while it’s certainly true that the first half has been slow, this should have come as no surprise. We were never expecting the market to burst back into life – why would it? Previous recoveries have taught us that it will take time for investment activity to gain momentum.
However, with repricing, rate cuts and rent growth, this has all the hallmarks of being an exceptional vintage year to invest in European real estate. For those investors ready and able to deploy capital, we strongly believe that today offers a unique opportunity to gain access to stock that is often either unavailable or prohibitively priced during other phases of the cycle.”
Are we starting to see more certainty around pricing, or does the stalemate continue?
“We’ve seen competitive bidding making a comeback and investment activity on the rise. This has really helped to steady the ship for the yields of top-notch assets in the most liquid markets. Remember how prime yields were growing by 25 basis points every quarter in 2023? Well, that’s almost down to zero now!
And let’s not forget about the occupier fundamentals - they’re still going strong. Despite starting the year with the shadow of a recession looming over us, both the Eurozone and the UK have managed to bounce back with economic growth. Plus, with vacancy rates in most sectors at or even below the average levels we’re used to, rents have kept on climbing, especially at the prime end of the market.”
What are the key risks driving investor sentiment currently?
“Being an excellent vintage does not mean a market without risks, and we should stress that the coming few years will not be easy. It will take time for liquidity to return to the market, and financing is also expected to remain challenging well into the second half of the decade. History suggests that this is unlikely to be enough to prevent recovery, particularly for prime assets, but it may be one of the factors holding back transaction activity over the coming years.”
Simon Wallace will be co-chairing the Global Capital Flows session at Europe GRI 2023 on 10-11th September. (Credit: GRI Club)
How do you see the next 12 months playing out? When will transactions pick up?
“Transaction volumes are already starting to pick up. We saw early evidence of this during the second quarter, and we would expect this to continue through the rest of the year. Again, this doesn’t mean we’re expecting a rebound in activity back towards previous highs. It will very likely take years for the market to see the level of transactions recorded during the highs of 2021.”
This is the year of elections, the most recent being in the UK and France. How do you see each of these impacting the real estate market?
“In the short term, the political stability following Labour’s win is likely to enhance the attractiveness of UK real estate to international investors, especially given the growing uncertainty in other parts of the world. This stability, if coupled with economic growth, could boost investor confidence, improve liquidity, and support price recovery in the UK market.
London’s real estate market, already viewed positively by DWS, is expected to benefit from the election result. A more stable relationship with the EU could support London’s office market, while more welcoming visa rules may also benefit the residential sector, particularly student.
Labour’s pledge to deliver 1.5 million houses over the next Parliament, through changes to planning policies and new town developments, could impact the private rental sector. However, the UK residential market is currently undersupplied, and therefore we see few risks of oversupply.
The recent French election has created a climate of uncertainty that could impact real estate investment volumes, particularly from overseas sources.
Despite this, the Paris office market remains robust with low vacancy rates and constrained development. The election results are unlikely to significantly alter these dynamics. However, long-term political instability could undermine the confidence of international occupiers in expanding their presence in Central Paris.
The outlook for the logistics sector also remains positive despite the elections. Low vacancy rates and constrained development activity continue to support this sector.
Overall, the impact of the French election on real estate is nuanced and will depend on future political and economic developments.”
“Germany is still our top pick for Europe. For some this will be controversial.” (Credit: Posztós János | Adobe Stock)
Where does DWS see the most opportunities at present?
“Today we favour prime assets in large and fundamentally strong gateway markets, which we believe could be the first to see the material uptick in capital.
The UK sits closely behind Germany in our outlook. Prime London already looks to be returning to growth, but it’s not just the capital. Logistics looks well priced for the medium term, while residential is in short supply and still emerging as an institutional sector. Prime retail is also increasingly in favour, attracting capital with higher yields and improved occupancy.
Despite the election, we also remain in favour of Paris. Indeed, the election may provide opportunities for a contrarian approach. The French capital, in line for a possible Olympics boost this summer, looks increasingly attractively priced, having recorded a marked rebasing during the second half of last year, while corridor and urban logistics remain in focus.
Outside of Core Europe, we see good opportunities in parts of Spain and the Nordics. Spanish shopping centres are some of the most robust in Europe, while residential fundamentals across Madrid and most of the major regional cities look exceptionally strong. In the Nordics, residential is fast-growing.”
DWS is German-based. What opportunities are you seeing in Germany at the moment?
“Germany is still our top pick for Europe. For some this will be controversial. Much has been written about Germany, the “sick man of Europe”, while the property market faces questions over debt and domestic capital. However, digging into the details, we see a real estate market that is both attractively priced and fundamentally strong – particularly for prime residential and logistics. And while it may take some time for domestic capital to gain momentum, broadening the rebound, the country looks well set for above average returns over the medium term given exceptionally low vacancy rates and a collapse in new supply.”
Which real estate sectors are performing the best in the current market?
“We favour residential and logistics, with both already showing the first signs of recovery. Neither sector is without challenges though: logistics vacancy has been edging higher over recent quarters, while residential regulatory concerns remain prevalent. Nonetheless, given extensive repricing across both sectors, alongside well understood occupier fundamentals, both look well placed to outperform over the coming five years on both an absolute and a risk-adjusted basis.”
Are there any emerging sectors or niches that DWS is particularly excited about?
“While hardly a new sector, the growth of AI over the past few years has refocused occupier and investor interest in data centres. Given exceptionally strong demand and notable supply constraints, particularly with regards to energy and water, the sector is certainly in a strong position. However, it is still in its infancy, with technology and liquidity presenting clear risks, and therefore developing a deep operational understanding will be important for investment into this part of the market.
The niche sectors do not start and end with data centres though, far from it. Indeed, the real estate market only looks set to become more diverse over the coming years, as the likes of student and senior housing, self-storage and cold storage, life science and medical office, and even battery storage forming a progressively large part of the investable universe. And as more investors target these sectors, higher liquidity, alongside structural demand drivers such as demographics and technology, suggest potential outperformance.”
Join Simon and other leading European real estate market players for two days of roundtable knowledge sharing and networking at the upcoming Europe GRI 2024, where Simon will be co-chairing the ‘Global Capital Flows’ session.
“Today we favour prime assets in large and fundamentally strong gateway markets, which we believe could be the first to see the material uptick in capital.
The UK sits closely behind Germany in our outlook. Prime London already looks to be returning to growth, but it’s not just the capital. Logistics looks well priced for the medium term, while residential is in short supply and still emerging as an institutional sector. Prime retail is also increasingly in favour, attracting capital with higher yields and improved occupancy.
Despite the election, we also remain in favour of Paris. Indeed, the election may provide opportunities for a contrarian approach. The French capital, in line for a possible Olympics boost this summer, looks increasingly attractively priced, having recorded a marked rebasing during the second half of last year, while corridor and urban logistics remain in focus.
Outside of Core Europe, we see good opportunities in parts of Spain and the Nordics. Spanish shopping centres are some of the most robust in Europe, while residential fundamentals across Madrid and most of the major regional cities look exceptionally strong. In the Nordics, residential is fast-growing.”
DWS is German-based. What opportunities are you seeing in Germany at the moment?
“Germany is still our top pick for Europe. For some this will be controversial. Much has been written about Germany, the “sick man of Europe”, while the property market faces questions over debt and domestic capital. However, digging into the details, we see a real estate market that is both attractively priced and fundamentally strong – particularly for prime residential and logistics. And while it may take some time for domestic capital to gain momentum, broadening the rebound, the country looks well set for above average returns over the medium term given exceptionally low vacancy rates and a collapse in new supply.”
Which real estate sectors are performing the best in the current market?
“We favour residential and logistics, with both already showing the first signs of recovery. Neither sector is without challenges though: logistics vacancy has been edging higher over recent quarters, while residential regulatory concerns remain prevalent. Nonetheless, given extensive repricing across both sectors, alongside well understood occupier fundamentals, both look well placed to outperform over the coming five years on both an absolute and a risk-adjusted basis.”
Are there any emerging sectors or niches that DWS is particularly excited about?
“While hardly a new sector, the growth of AI over the past few years has refocused occupier and investor interest in data centres. Given exceptionally strong demand and notable supply constraints, particularly with regards to energy and water, the sector is certainly in a strong position. However, it is still in its infancy, with technology and liquidity presenting clear risks, and therefore developing a deep operational understanding will be important for investment into this part of the market.
The niche sectors do not start and end with data centres though, far from it. Indeed, the real estate market only looks set to become more diverse over the coming years, as the likes of student and senior housing, self-storage and cold storage, life science and medical office, and even battery storage forming a progressively large part of the investable universe. And as more investors target these sectors, higher liquidity, alongside structural demand drivers such as demographics and technology, suggest potential outperformance.”
Join Simon and other leading European real estate market players for two days of roundtable knowledge sharing and networking at the upcoming Europe GRI 2024, where Simon will be co-chairing the ‘Global Capital Flows’ session.
