PropertyEU quotes Savills on the yield shift in today’s European retail property markets. According to Savills’ research, prime shopping center yields have risen from 5,0% to 6,3% over the past year. In value terms, that’s down 21%, mind you.
Like Savills, you may think of this repricing as a perfect opportunity to acquire ‘affordable’ assets:
‘Despite the obvious difficulties in the European retail investment market, yields are generally beginning to move out, making prime shopping centre properties increasingly affordable compared to the peak of the market in mid 2007,’ said Eri Mitsostergiou of Savills European research. ‘For those investors who have the equity, this affordability may begin to present opportunities for good value deals.’
And I can relate to that opinion – knowing that it comes from an real estate agent – in general terms: buy low and sell high. However, you should bear in mind where this repricing comes from: as with all investments, today’s value is dictated by future profits or, for that matter, future cash flows. Therefore, investors should not only look at today’s prices, but should also pay close attention to the development of the rental income from the assets. The recent yield shift is actually a reflection of increasing risk premium on these future cash flows (e.g. tenants going bust, market rents going down, falling turnover rents etc.)
LaSalle Investment Management identified a similar situation occurring in the UK already by the end of 2008:
In this challenging environment, LaSalle advised, the first objective for investors is to keep a more defensive strategy by protecting income streams and looking beyond current market conditions in order to take advantage of capital shortages and re-pricing. LaSalle advised European investors should start to tilt their portfolios from offices towards retail as it proves a more defensive stock with restrictions on demand making it more recession proof.
LaSalle recommended ‘back to basics’ portfolio management, which means managing liquidity well and staying close to tenants.
I cannot agree more. Real estate is an asset class that needs to be worked on in order to sustain profitability. So, just buying on low prices isn’t enough. ‘Back to basics’-investors in real estate with a keen understanding the dynamics of real property, will be able to benefit in the long run.