Investor appetite for risk is anticipated to reduce this year due to the expectation of more moderate economic growth and total returns as yield compression eases. This will manifest as a shift in investment strategies towards targeting performance through income and income growth. In part this reflects a return to the traditional role of property investment, which is as an income producing asset class as over the longer term property performance is driven predominantly by income return. However, investors will also be seeking opportunities for income growth in order to deliver outperformance. Therefore, we expect continued appetite for properties in locations with strong occupational demand, which offer value-add opportunities. In addition to offering the ability to capture rental growth, by delivering repositioned or refurbished assets into a market that is short of supply, this strategy should also enable investors to buy into a market at a higher yield, acquiring assets that are potentially less vulnerable to outward yield shift as monetary policy reverts to the “new normal”.
Consequently, we expect investor demand to become increasingly selective over the year. Appetite should remain strong for core properties or well configured assets with asset management opportunities in good locations but poorer quality secondary and tertiary assets in weaker locations will struggle.