Beating the market
In the current low yield environment in Europe, investors are finding it ever more difficult to find the deals that will deliver the return they have promised their investors. Yields seem to be reaching a plateau in many sectors, suggesting there is increasingly limited scope for property prices to diverge from rents. The risks are present for both income and growth-focussed strategies. For income, the main risks are low inflation and the potential of rising interest rates. Growth investors, meanwhile, who are faced with little prospect of further yield compression, need to find ever more inventive ways of extracting value from properties.
Whilst some sectors – such as logistics – may offer more lifetime investment value than others, sources of returns must be found elsewhere. Those investors that have been able to capitalise on a prolonged period of low interest rates, or those that have managed to pick up rental growth by buying earlier in the cycle, will enjoy sustained returns during the life of their mandates.
Many investors acquire based on a confident plan comprising asset management initiatives of varying complexity: they are ready to accept higher risks in exchange for the potential of higher returns. Achieving these returns through traditional property asset management activities, including lease regears, capital expenditure, asset repositioning and adding income through non-traditional sources, is a compelling and potentially lucrative strategy.
Investment managers may boast about their investment prowess by showcasing past successes, but the wall of investment capital, coupled with near record low yields, will be punishing for those investors that are unable to transcend traditional investment strategies. The pursuit of success simply through income, growth and scale investing is neither sustainable nor desirable. Tomorrow’s successful strategy will instead have to combine the pride and business acumen of property professionals with the technical skills of other industry participants and thereby place consumers’ needs and technology at the centre of investment decision-making.