Investment volumes for Continental European real estate this year are set to overtake last year’s high, according to M&G Real Estate.
The company said it expected strong investor demand for real estate, with yield compression continuing.
So far this year, Spanish offices, German industrial property and Belgian and Irish shopping centres have seen yields fall the most.
M&G Real Estate senior research analyst Vanessa Muscarà said investment was set to reach a four-year high, with Continental capital volumes in the first half of this year up 33% year on year to €67bn ($71.8bn).
“Yields appear to be low, but they could compress further because of the way the macroeconomic story is,” she said.
“There’s an expectation of rental growth further down the road.”
She said yield compression was likely to continue across the euro-zone’s affluent second-tier cities.
In Denmark, Italy, and the Netherlands, Muscarà said M&G Real Estate saw scope for the spread between prime and second-tier cities to reduce by 40 basis points or more.
“With record capital flows targeting Europe’s gateway cities, we see the opportunity to further boost returns by looking further afield and investing in affluent second-tier cities that offer greater scope for future yield compression,” she said.
US investors have also become increasingly active across Europe, with capital flows from the Americas in the first six months of 2015 reaching 70% of the volumes seen over the whole of the previous year.
“We expect this trend to continue in the short to medium term, supported by the competitive euro/dollar exchange rate,” Muscarà said.
Continental Europe is following the US and the UK into a phase of solid economic growth, with buoyant consumer demand, rising employment and improving lending conditions.
Rental growth is gradually picking up across the region, with short-term prospects best for prime high street retail.
Muscarà said other sectors were likely to do well in the coming years, creating an “attractive investment climate for pension funds and insurers looking to generate a strong income stream at a time of low bond yields and base rates”.
M&G highlighted increased appetite to invest in scale by buying portfolios of assets.
“As investors move up the risk ladder, portfolio deals are likely to feature more alternative sectors such as healthcare, leisure or student accommodation,” Muscarà said.