Pension funds are shunning higher yielding secondary real estate property for pricier ‘prime’ real estate, a report shows.
A study by real estate fund manager Prupim found investors are continuing to favour ‘prime’ real estate, distinguished by its better quality, better location and more favourable lease structures, over riskier ‘secondary’ or ‘tertiary’ real estate assets.
The high price of prime real asset has forced some funds to seek out better performing secondary assets as investors continue to feel underwhelmed about the prospect of stronger domestic economic growth, Prupim said.
Prupim deputy head of research Richard Gwilliam said: “As cash-rich overseas investors seek safe havens, the UK commercial property market is now as bi-polar as it has ever been: yields on prime assets are being driven down, while investors of all kinds are still generally wary about secondary assets, which may offer more value over the long term.
“The high prices quoted for some of the ‘primest’ assets has forced some investors to look for better value elsewhere, and selectively increase exposure to good secondary assets. But overall, secondary and tertiary stock continues to be shunned by investors worried that a long-term stagnant economy will subdue rental growth, the engine of property returns.”
The study also showed the industrial sector has overtaken the office sector as the top performing real estate sector.
Industrial real estate overtook office property in the final quarter of 2011 after the office sector led the way for the first three quarters.
This was caused by a sharp deceleration in the London office segment in the second half of 2011, which hit broader UK office market trends, the study found.