The Idea That Prime Property Outperforms Is A Myth, New Research Says

New research from one of the world’s largest fund managers has challenged a longstanding truism — that the best quality commercial real estate outperforms more average property.

A new paper from the European research team at AEW, which has €85B ($91B) of real estate assets under management, shows European prime property made an average total return of 5.8% between 2018 and 2022, while average quality property made a total return of 6.2%. Over the next five years, it predicted that returns for prime and average property would be almost identical to each other. 

AEW used returns from unlisted property funds published by INREV to calculate the return for average property and compared that to a pool of 200 prime properties. The analysis looked at 20 countries and four property sectors. 

Prime property outperformed average quality property until about mid-2019, when the two types started to converge, AEW said. Since then, with the odd fluctuation, the performance of the two has been highly correlated.

That trend is set to continue, although the analysis also found that in some countries and in some sectors, the performance of prime and average property diverges.

The UK is the country in which prime property outperforms average by the largest amount. European prime logistics and offices have also outperformed average properties for the past few years, albeit to a lesser degree. 

Average quality rented residential and retail have outperformed their prime peers, a pattern also set to continue, according to the paper — in the case of retail, significantly so.