EUROPE - Pension funds may display more caution in their real estate investment decisions over the coming months because of emerging signs of a slowdown in yield returns.

Hans Op’t Veld, senior investment strategist for structured investments at PGGM, said while the Netherlands pension fund giant is not turning its attention away from real estate investment, it may need to look more carefully at any decisions over the coming months as interest rate rises in the US and UK could slow potential growth returns.

"We see certain parts of Europe and the UK where there are moves not only in the stock market but the real estate market has also shown the first signs of yield increases. What it will mean for institutional portfolios is now a focus and we do need to be a little more cautious in where we invest," said Op ’t Veld.

While he is not suggesting real estate markets are heading for a downturn, PGGM may question more closely where it places and maintains its investments, particularly within the office and retail real estate market, said Op ’t Veld, in order to maintain investment potential.

"Yields are not increasing yet but it appears we may have reached the fold in terms of yields. In the UK secondary retail and office space, there seems to be the sense values are coming down a bit. We are expecting further increases in interest rate rises and this makes us wonder whether it will have an impact [on yields] going forward.

"The rental markets seem to be in pretty good shape. Economic growth is pulling rental growth but capital markets are affected by interest rates, so we wonder what is going to drive the markets going forward. We do see things happening, but we run a big ship which you can’t just turn on a dime. You can’t pull away from the market but we may shift our real estate focus," he added.