EuroProperty has published a sharp wakeup call for the real-estate investment and asset-management business from WG Associates’ Chairman Walther Ghislain.
The article spells out the three key factors of which commercial property investors must be aware before investing in real estate / real-estate funds, whether that is office buildings, retail or logistics:
1) Commercial property prices are over-valued, particularly in Europe. The imbalance between the limited supply of good property and investor demand, has meant investors increasingly speculate on riskier, older and unfit-for-purpose property.
2) Real estate yields are at an all-time historical low, because rents are not keeping pace with rampant property price inflation.
3) The success of commercial property investments hinges on the ability to meet present and future needs of a sitting or potential tenant.
Ghislain then explains how these trends have impacted each of the three main asset classes:
1) Office – cost cutting, down-sizing, geographical restructuring and outsourcing in the public and private sector has led to an oversupply of office space. At the same time, organisations are focused on improving employee productivity/performance, well-being and contentedness, through improving the work environment. This means organisations are not just looking for less office space, but have very different demands for the type of office space they require.
2) Retail – with many retailers rationalising their store estates and some closing their doors for good, there is a glut of retail space in malls, shopping centres, retail parks and high streets. This has forced the shopping locations to reinvent their businesses to attract the big name brands / retailers and the flagship stores and the other attractions that bring in increasingly picky shoppers.
3) Logistics facilities – to be able to deliver what customers want, and exactly when they want, retailers and their logistics partners, need cutting-edge often custom-built facilities. This means obsolescence in logistics is even faster than with office or retail asset classes.
This does not mean investors should shy away from property; but it does mean that investors must assess the need for and cost of capital investment to please existing and future tenants and include these costing in models for acquisition of all commercial property, particularly older assets.