Continental Europe offers strong returns

Despite elections in the Netherlands and France in the first half of the year, the consensus forecasts for Eurozone GDP suggest only a modest slowdown to 1.6 percent in 2017 (down from 1.7 percent in 2016), according to M&G Real Estate’s Continental Europe market Outlook.

It points to positive sentiment being based on rises toward the end of 2016 in the Eurostoxx, Purchasing Managers’ Indices and headline inflation, as well as the continued recovery of the Eurozone labor market, and decision by the European Central Bank to extend its quantitative easing program to the end of 2017.

Slower rental value growth than expected

In the Eurozone occupier markets, although the Outlook suggests a period of slower rental value growth than previously expected, it highlights the weight of capital continuing to be drawn by the current strength of many office occupier markets and the prospect of increasing rents, especially in Spanish and German cities, as well as Stockholm.

Tight development pipelines will also continue to boost office rental growth in many markets and, overall, the European office sector is expected to generate 1.7 percent per year average rental growth over the next three years.

As the first sector to recover in the European cycle, the Outlook states that retail rents are the most likely to stabilize ahead of other sectors. M&G Real Estate expects the combined European retail sectors to generate 2.6 percent per year average rental growth over the next three years.

The Outlook states that the short-term political backdrop, in addition to uncertainties over the outcome of trade negotiations following Brexit, are unlikely to significantly affect the long-term growth prospects of the European logistics sector.

M&G Real Estate states that this view is supported by structural ecommerce and reshoring trends. It expects the European industrial sector to generate 1.2 percent per year average rental growth over the next three years.

Weight of capital to see yields move lower

With real estate offering attractive spreads above bonds, the Outlook states that the political outlook across Europe is clearly not dissuading investors from allocating capital to the asset class.

M&G Real Estate notes that prime property yields are already at historic lows. Given the attractive spreads versus 10-year government bonds, however, it does not believe prime real estate yields have found a floor yet.

At the all-property level, it states that the weight of capital chasing core assets will see yields move lower, by around 10 basis points to 20 basis points at an aggregate European level.