GLOBAL - Investors have lowered their return expectations for investing in US real estate over the next few years, according to PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI).

The latest Emerging Trends in Real Estate report from PwC and ULI show that while the US market is expected to recover, most investors anticipate single-digit returns for core US properties going forward.

Respondents to the annual survey said real estate assets in the US would be unable to sustain higher performance seen in the past without the use of ample leverage or by taking on greater risk.

The findings come a week after DTZ research showed that global capital flows into US real estate was set to double in 2011, and a number of European pension funds told IPE Real Estate they were intending to invest in the US.

John Forbes, real estate industry leader at PwC in the UK, said the improving market in the US was creating an opportunity for fund managers to raise capital from Europe.

Separately, a German pension fund, which would prefer to remain anonymous, told IPE Real Estate it was unclear whether it should invest in US real estate.

The pension fund said it believed the country was undergoing a structural change to its economy whereby unemployment was set to remain at a historically high level, offsetting the attractive pricing for property assets.

Meanwhile, the PwC/ULI report predicted the emergence of a two-tier market between prime and secondary market, which has already been seen in the UK market.

Mitch Roschelle, partner at PwC, said: "The market is predicting extreme bifurcation as the capital flight to quality creates a greater separation between the trophy and less desirable assets.

"Well-located and well-tenanted properties that can generate strong cash flow over the next several years are exactly what buyers and lenders want, according to survey respondents.

"As a result, prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital."

Debt markets are expected to thaw further in 2011, according to the report, as banks continue to strengthen balance sheets, take their losses and step up lending, resulting in higher transaction volumes.

Stephen Blank, ULI senior resident fellow for real estate finance, said: "Real estate market participants continue to see a gulf between buyers and sellers.

"However, there is an expectation the bid-ask spread will begin to close in 2011 as selling sentiment improves dramatically from last year's all-time survey lows and buyers temper expectations for giant discounts.

"Investors with cash could have excellent opportunities to seize market-bottom plays by recapitalising cash-starved owners or buying foreclosed assets."