Despite its current woes, Russell Chaplin - Aberdeen Asset Management’s chief investment officer - says high-return investment opportunities will materialise in Europe over the next two years.
“It’s probably too early to go wholesale into markets like Greece, Spain and Ireland,” Chaplin says, “but there are certainly themes beginning to emerge in some of those markets that look like you could exploit.”
“Typically you find the highest returns come out of those markets with the highest risk. I think the perception of risk at the moment is that it is very high in Europe,” he says. “I suspect that is where we will see some unexpectedly good investment opportunities come out over the next two years.”
“They may not be in the more stable markets we’ve seen in the last few years, I think we’ll continue to see money going into those markets, but perhaps the unexpectedly high returns coming from markets like Ireland, like Spain.”
Chaplin says investors will become more discerning about where they look for assets and try to uncover mispricing, particularly in Europe.
“European investors [are] still looking for the same kind of risks and returns that they were [three years ago],” he says, “I guess they’ve become more wary of the southern European market and are much more focused on quantifying the risk of the investment they’re making. We see continued interest.”
“We’ve seen interest particularly in northern Europe and the Nordic region. That has been a focus for us,” Chaplin says.
Sentiment currently favours markets like the UK, Norway, Sweden, Finland, France, Germany and the Netherlands. It is against Ireland, Spain, Portugal, Greece, and Italy to some extent.
“Clearly people are very concerned about the Euro and what might happen there, particularly in markets that have already received capital from European funds set up to support those countries,” Chaplin says.
“Sentiment is completely mixed.”
Globally, Chaplin says investors have been looking at income producing, bond substitute, prime office assets in key financial markets such as London, Paris, Frankfurt and New York, in the US, UK and Europe. He says the secondary focus has been “the rest of the market”.
“There is a whole other area of stock which we think has been forgotten about to some extent - good quality, core properties - but they may not be in the capital city office market,” Chaplin says.
Over the next 12 to 18 months, Chaplin says a shift will occur.
“We’re now getting to the point where many of those [prime] assets sought by investors looking for the bond substitute are getting quite overpriced in most markets,” he says, “I think people are going to need to look more widely than that if they’re going to access the returns they’re looking for.”
“Vacancy rates are rising in many markets, rents are stable or falling in a lot of markets. The occupation market is relatively weak, but the investment market is relatively strong. That typically means people are overpaying for assets.”
“The environment going forward, I think, is trying to identify those assets where you can find good, risk-adjusted return,” he says.
Over the short to medium term, Chaplin says limited office supply in the prime financial markets will see assets become “more heavily priced”. However, he says investors will continue to seek them out.