Offices Leap Up Abdrn Buy List As Some Markets Will See 10%-Plus Returns

UK offices have jumped up Abrdn’s subsector rankings, and capital value declines for the UK and European office sector have become less severe, according to the global investor’s latest forecasts for real estate returns.

Abrdn’s view of the sector has also improved thanks to the brightening picture for some offices, which the investor no longer sees as such a drag on overall returns, it said. It predicted a deeper “construction crunch” that will limit new supply and heighten rental pressures

The global investment company, which manages more than £30B of real estate assets, recently upgraded its house view on real estate for a third quarter in a row, and Abrdn said it had made further upgrades after considering ongoing market momentum, construction constraints and improving transaction activity, while increased liquidity in logistics, residential, retail parks and core offices should give comparable evidence on pricing.

“The year kicked off with a somewhat shaky start for real estate given wobbles in the gilts market. However, we are accustomed to short-term volatility and remain convinced the property market correction is over and we have entered a new growth phase — at least for high quality assets,” Abrdn Global Head of Real Estate Anne Breen said in a statement.

Construction new orders in the EU were down by 14% year-on-year in December, according to data from Eurostat, helping prop up values for existing assets.

“Europe and the UK are facing a persistent construction crunch because of high costs and planning permission hurdles,” Breen said. “While solving this is key to Europe’s long-term prosperity, and will help to unlock our own long-term ambitions, the reality is in the short term, this should further support property valuations.”

The biggest change in Abrdn’s forecasts is that it now expects offices to act as “less of a drag” on returns, with double-digit returns in some office segments in 2025, including London’s West End, the Paris central business district, Madrid CBD and central Amsterdam. 

However, Abrdn said that it continues to prefer residential and logistics, although the UK offices have jumped up Abrdn’s subsector rankings, with West End offices climbing to fifth in the ranking from 12th out of 34. Mid Town offices have risen to 17th from 23rd.

“While we have been underweight offices for a number of years, we have noticed a significant improvement in prospects for the sector and believe there will come a time when investors without an office exposure will underperform,” Breen said. “Of course, the questions investors will now need to consider are: when does that time come and what does a performing office look like?”