European property returns hit 6-year high

The huge inflow of investment into European commercial real estate and rising prices for offices and malls helped push returns for the sector last year in euro terms to 14%, up from 13% in 2005. This is the highest level since 2001, the London-based Investment Property Databank (IPD) said.

Cautioning that the IPD's Pan-European Index is a 'backward-looker' and not a crystal ball into the future, Ian Cullen, co-founding director of the IPD, said that returns in Europe for 2007 are likely to come in below last year's level. Indeed, some market watchers are concerned about strong yield compression and the dangers of oversupply. ‘At a presentation of the index, the economist on the podium was gloomy and the property expert was cautious, as we are coming out of a period of strong yield-driven recovery,’ said Cullen.

The Pan-European Index covers 14 Western European countries, including eight Eurozone countries, is based on a sample of properties worth EUR 625 bn. The UK, which accounts for 45% of the market, registered total returns of 11.9% in 2006, up from 10.5% the previous year. Nine other European countries returned at least 10% in 2006. Germany reversed five years of declining returns by returning 1.3%, up from 0.5% a year before.

The Nordic region was the chart-topper last year, with returns in euros of 17.1%. Denmark was the best performer on 17.8%. On a sector basis, retail delivered the strongest result in 10 countries in 2006 - continuing its dominant performance since 2001. However, returns in retail were lower in some countries compared to 2005, crucially in the UK.

Offices were the fastest growing pan-European sector in 2006. Cullen said that it is clear capital growth was the main factor driving returns in Europe. ‘Income return had nothing to do with it,’ he told PropertyEU. The Pan-European index for 2006 shows income return across Europe at 5.1% in 2006 was as slightly below year before.

'At least six markets were more dependant on yield compression than rental market growth,' said Cullen. He said total returns in Europe in 2007 will fall below last year's level as the larger markets like the UK have already peaked. 'The dream scenario for a pan-European investor would be for a drop in the UK market to be compensated by a very strong recovery of the German market. But that is very optimistic.'

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