The main short-term threat to real estate is not Brexit, or markets topping out, but the possibility of rising interest rates.
Speaking at Expo Real in Munich, Mark Gifford, head of European transaction at UBS, said: “Short-term I think it is just a question of watching what is happening with inflation and interest rates, where they are going, and how quantitative easing is going to start being pulled back by central banks.
“We are already seeing some noises from the Bank of England that interest rates are going to go up, possibly sooner than we originally anticipated.”
“I think at some point it could have a negative impact. If interest rates start rising, inflation has already increased, that could have a negative impact on yields. That’s why we are so focused on income growth, to protect on any downside as yields drift.”
Gifford said UBS is also focusing on the “mega” trends and how they will drive growth and affect markets.
“Longer term, our strategy looks at all the mega trends: technology, urbanisation, demographics, ageing populations. For instance how technology could impact, driverless cars, electric cars, how that could have an effect on the uses of some buildings. It is looking at how those trends could affect real estate in the future, which drives us to our preference for city centre locations.”
Gifford, who manages transactions across the Continent for the asset manager, said there is no particular market UBS will not invest in, although there are asset types it steers clear of.
“I would not say there are any markets we do not like… In terms of sectors we are not keen on suburban offices, we do not see where the growth is there, and we do not believe there will be rental growth in those locations.
“Generally I think there are opportunities in all the markets, you just need to be selective.”
The Brexit referendum had not had a particularly negative impact, at least for the moment, he said. Currency has more effect on returns than political risk.
“We have not seen any negative impact from our own investors,” he says.
“Initially there was expectation yields would rise, but we did not really see that, London still attracts a lot of foreign capital.”
Gifford pointed out the well-documented boost devaluation of the pound had made to investment.
“I think nobody really knows what is going to happen with Brexit. There is definitely going to be some negative impact, finance is a large part of the London market. While there are other sectors that will take up some of that space, certainly, if we do not get passporting for funds, that could have a negative impact.”
Gifford already thinks London office demand has slowed, and said UBS was a net disinvetsor in the city for the moment.
“What we see now is that demand in London offices has reduced and there is a lot of development going on in London… so I think there has been a negative impact in terms of rental growth.”
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