Continental European real estate markets should offer strong returns during 2017 despite the Dutch and French elections in the first half of the year, according to M&G Real Estate.
Consensus forecasts for Eurozone GDP suggest only a modest slowdown to 1.6% in 2017 (down from 1.7% in 2016), the firm's latest Continental Europe Market Outlook notes.
The report points to positive sentiment based on rises towards the end of 2016 in the Eurostoxx, Purchasing Managers’ Indices (PMIs) and headline inflation, as well as the continued recovery of the Eurozone labour market, and the decision by the European Central Bank (ECB) to extend its quantitative easing programme to the end of 2017.
With real estate offering attractive spreads above bonds, the political outlook across Europe is clearly not dissuading investors from allocating capital to the asset class, the authors of the report argue.
Prime property yields are already at historic lows, but given the attractive spreads versus 10-year government bonds, M&G Real Estate does not believe that prime real estate yields have found a floor yet.
Rental value growth
Although the Outlook suggests a period of slower rental value growth than previously expected, it highlights the weight of capital continuing to be drawn by the current strength of many office occupier markets and the prospect of increasing rents, especially in Spanish and German cities, as well as Stockholm.
Tight development pipelines will also continue to boost office rental growth in many markets and, overall, the European office sector is expected to generate 1.7% per annum average rental growth over the next three years.
Retail rents were the first sector to recover in the European cycle and are the most likely to stabilise ahead of other sectors, the study shows. M&G Real Estate expects the combined European retail sectors to generate 2.6% per annum average rental growth over the next three years.
The Outlook states that the short-term political backdrop, in addition to uncertainties over the outcome of trade negotiations following Brexit, are unlikely to significantly affect the long-term growth prospects of the European logistics sector.
This view is supported by structural e-commerce and reshoring trends, the report says. Meanwhile the European industrial sector is expected to generate 1.2% per annum average rental growth over the next three years.
M&G Real Estate had £26 bn (€31 bn) invested in real estate across Europe, North America and the Asia-Pacific region at end-2016.
