Aviva Investors has lowered its return expectations for UK real estate for this year.

The investment manager said it now expected an annual 6.6% return from the sector, down from its initial 8.7% forecast.

Performance is, Aviva Investors said, likely to be strongest in the UK’s regional office and industrial sectors.

Richard Levis, global real estate analyst, said: “We do not expect rental growth to wholly offset the slower decline in yields. Our total return expectations are moderately lower than three months ago, at 6.6% for 2016, and averaging 5.1% per year between 2016 and 2020.

“Risks we are monitoring in addition to Brexit include the possible re-emergence of the euro-zone debt crisis, a faster rise in US interest rates than currently expected and a sharper decline in Chinese economic output.”

Total returns for UK real estate continued to lose momentum in the first quarter of this year, with the IPD UK Monthly Index showing All Property returns at 1.1%, their lowest quarterly reading since 2012.

“The high levels of financial market volatility seen at the beginning of this year have eased, but, with economic growth having weakened, a general ‘risk-off’ mood has continued to prevail,” Levis said.

Although there has been a partial recovery in the price of UK Real Estate Investment Trusts (REITs) since February, the market remains subdued, with many REITS trading at a large discount to their net asset value.

“That may foreshadow further weakness in the direct property market,” Levis said. 

He said performance over the next five years was likely to be strongest in regional offices and industrial assets and weakest in more volatile segments, including prime London offices and retail.

“Yields in these parts of the market have reached all-time lows, and they appear vulnerable to occupier demand shocks or unexpected interest rate tightening,” he added.