Capital values set to outpace rental growth for next 5 years

Capital values are more than likely to continue to outpace rental growth in the next five years as economic and employment growth are set to remain relatively subdued, according to Joe Valente, head of research and strategy for the European Real Estate Group at JP Morgan Asset Management.

Pricing should come under further pressure given the attractive spread property offers over other assets, even after the recent bond market correction, Valente said in a commentary. 'Over 2015-19 it is likely that average annual capital value growth of 5% will be around double the rate of rental value growth.'

Capital values rose by 4% in the eurozone during Q1 2015, the strongest rise recorded since 2007. What makes this rise in values different, Valente said, was that it was partly due to a fall in property yields (11 basis points) as well as rents which increased by 1.2% q/q.

This is the first notable increase in rents after the best part of four years during which rents did little beyond move sideways, Valente noted. He added, however, that this does not mean that investment and occupational markets will begin to move in the same direction.

'Whilst recent rental growth is, indeed, a positive development, the region remains a long way from robust rental growth,' he said. 'Occupier markets remain subdued and employment growth of 0.5% (yoy) is virtually non-existent compared with 3.5% growth rates pre-GFC.'

Given the subdued nature of the underlying occupier markets, at least in the office and industrial sectors, it is easy to feel that there is an increasing divergence between investors’ pricing perceptions and actual fundamentals, Valente said.

'Low risk-free rates explains some of the buoyancy of capital values, but it cannot explain why retail, office and industrial yields have moved in a broadly similar fashion despite the different behaviour of rents. The inevitable consequence is that eurozone property values will look increasingly vulnerable and exposed to a correction in pricing at some point in the near future,' he predicted.