The risk of investing in offices and shops is still difficult to assess, particularly in secondary locations. Uncertainty about the future of offices and inner-city shopping areas means investors will remain cautious until the long-term effects of this crisis become more certain.

Major competition for scarce core product

Now that it has become clear which sectors are relatively resilient to the current circumstances, investors are flocking to these safe havens in droves. At the same time investments did not materialise in sectors where the risks were greater or less clearly defined, as shown by a considerable decline in investments <€25m, often in offices in secondary locations and high-street retail.

Jordy Kleemans, Head of Research & Consultancy at Savills in the Netherlands, says: “Large variations within sectors in the user market can be observed in the investment market. The transaction of the Jumbo portfolio worth approximately €300m to fund builder Annexum demonstrates this. This transaction involved the relatively stable category of supermarkets, whereas there were few transactions of high-street retail locations. This results in differences of gross initial yields even within certain sectors. Gross initial yields for office buildings in top locations remained largely stable at 3% but increased in secondary locations.”

A large amount of available capital

Core investment products, the main focus of investors at the moment, are limited; however, there is a lot of capital available. This is partly due to the ECB’s buy-back programme, for which an additional injection of €500 billion was announced last year. The ECB is also keeping the interest rate at the same level to help boost the economy during the COVID crisis.

Jan de Quay, Head of Investment at Savills in the Netherlands, says: “Real estate funds have also made more capital available for investment. The total available capital from the new funds was €315 billion at the beginning of 2021, compared to €281 billion at the beginning of 2020, +12%. This does not include the increasing number of investing households and the associated available capital. The investment options that meet the requirements of investors are limited and as such they are struggling to find suitable destinations for the available capital. This has resulted in a decline in the total investment volume in the first few months of 2021.”

Given the available capital, Savills expects that the total investment volume will pick up again, due to an increasing demand to achieve returns. For (sub)sectors where COVID has caused lasting economic damage, such as certain parts of the retail market, investors will remain reluctant to invest. In the long-term, the result is that the difference between core and other asset classes will widen. Since it will take at least until the summer before a large part of the Netherlands has been vaccinated, Savills expects a very dynamic Q3 and Q4, in which investment records may be broken.

Read the full report here.