Asset manager Abrdn has thrown its weight behind the global property sector today as it argued the UK is leading the way in a global recovery, City A.M. can reveal.
The poor period in the real estate market is now over, Abrdn predicted, as it forecast that residential, retail and industrial properties would all surge into overperformance.
In a note, the FTSE 250 firm said it had moved to an overweight position in those sectors and had shifted from an underweight position to neutral across property in general, meaning it was no longer looking to ditch property assets.
The UK is “leading the way” on this recovery, the asset manager said, buoyed by the new government. It expects total returns from UK property to average eight per cent in the next three years.
“We believe that the real estate sector has now mostly repriced following readjustments as the era of cheap debt came to an end,” Anne Breen, global head of real estate at Abrdn, told City A.M.
“As a result, we have now upgraded our house view on real estate to neutral after being underweight for around two years. Essentially, we think it is no longer the time to be underweight to real estate versus other asset classes.”
The current real estate cycle is “very different to previous ones”, she added, as rental income from property had “not been challenged in the way it was before”.
“That means the recovery for future-fit buildings should be faster – boosted by lack of high-quality supply,” Breen said.
Rolling annual returns in the UK are now almost back to positive territory, Abrdn said, while they remain down globally by five per cent.
However, the asset manager was hesitant to endorse the entire property sector, stating that it expected further valuation falls among lower-quality real estate assets, as the cost and time to redevelop weaker properties remains a challenge.
Offices are also expected to underperform the sector average, and high street shops and shopping centres were also viewed less positively due to ongoing challenges to stabilise net cash flows.
Instead, two sub-sectors skyrocketed up its rankings, with retail parks rising for 33rd to third in Abrdn’s ranking of the 34 property asset classes on which will deliver the best three-year returns, while standalone retail warehouses jumped from 30th to 15th.
Abrdn is expecting some real estate yields to hit decade highs, as the average yield on prime property in the UK and Europe at 5.7 per cent, up from 4.2 percent in the previous peak in June 2022.