Real estate will continue to be responsible for some of the most stable returns in the alternative assets industry, JP Morgan’s 2017 Long-Term Capital Market Assumptions report has said.
The study showed that long-term expectations for real estate returns have stayed relatively stable despite ongoing economic and political volatility.
RETURN EXPECTATIONS (IRR%)
| 2017 assumptions | 2016 assumptions | |
| Real estate – direct (unlevered, local currency) | ||
| US core | 5.5 | 5.5 |
| US value-added | 7 | 7.25 |
| European ex-UK prime | 5 | 5.5 |
| European ex-UK non prime | 7 | n/a |
| UK core | 5.25 | n/a |
| Asia-Pacific core | 5.5 | n/a |
| REITs (unlevered, $) | ||
| US REITs | 6 | 6 |
| Global REITs | 6 | 7.25 |
US core real estate was the only sector in the report where the projected long-term IRR stayed the same as last year, at 5.5%.
The study calculated expected returns for institutional investors over a 10-15-year period across a number of alternative asset classes, including real estate, infrastructure and hedge funds.
In the UK, returns in the core property market are expected to be in line with core markets around the world at 5.25% despite referendum-led uncertainties.
Although there has been a price correction since 23 June, Declan Canavan, EMEA head of alternatives at JP Morgan Asset Management, said Brexit was not “a big deal” in the long term.
He said: “For our long-term capital markets assumptions, Brexit is not really a big deal. There has been a little price correction in the UK market on the downside and that has dampened the appetite for construction.
“But if demand stayed at the same level and there is less construction, the thesis is that down the road you can have a construction squeeze and prices will go up.”
The prime European market, excluding the UK, will likely have a 7% IRR, down 50bps from last year’s report. Expected returns for opportunistic US investment were down 25bps, also to 7%.
In comparison, JP Morgan expected event-driven hedge funds to return 4.75% – down 125bps from last year’s 6% forecast.
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