Aviva upbeat on outlook for UK

Aviva Investors has improved its medium-term outlook for UK and expects 2013 to be a 'turning point'. It is also upbeat on prospects for the asset class improving on a global basis.

The improved outlook for UK as well as global commercial real estate follows last year's central bank intervention that led to a greater risk-appetite among investors.

In the UK, Aviva Investors now forecasts an average annual return of 8% for the five-year period of 2013-2017. When looking at the five year period from 2012 at this time last year, the team had forecast 6% cent or less.

David Skinner, chief investment officer of real estate at Aviva Investors said: 'We expect 2013 to be a turning point for UK real estate. Recent months have seen markets display growing conviction in central banks' commitment to extremely loose monetary policy, with risk assets such as equities and high-yield debt having rallied notably. In the UK this has made good quality real estate look relatively attractive and we believe the search for yield will drive strong returns in 2013.'

Skinner said prime assets would perform well in most locations, but added that investors are likely to be increasingly attracted to higher-yielding sectors with the focus shifting from the prime assets in London to secondary and regional markets. 'As a result, we think sectors such as industrials and offices outside central London will outperform on a risk-adjusted basis. The time is right, therefore, for selective secondary strategies.'

He warned, however, that although income risks are no longer deteriorating, they remain elevated. 'The retail sector, for example, is still suffering from a squeeze on household finances and structural changes resulting from the growth of online sales. Ongoing deleveraging is expected to be a further constraint on the performance of some parts of the market. So naturally, selective strategies in secondary and regional markets need to be designed with prevailing risks in mind.'

Within Europe, Aviva prefers high-quality assets with secure income streams in Germany and the Nordics. Prime Irish real estate may now also provide attractive opportunities.

On a global basis, Asia Pacific offers the highest potential returns, and other attractive opportunities to be found selectively elsewhere, the investment manager said.