Property markets in Continental Europe will benefit from an increase in inflation rates, which could materialise in 2011 despite weak economic growth, according to the latest European Market Perspective research report produced by Invista Real Estate Investment Management.
Property markets in Continental Europe will benefit from an increase in inflation rates, which could materialise in 2011 despite weak economic growth, according to the latest European Market Perspective research report produced by Invista Real Estate Investment Management.
The report points to the strong link between the majority of commercial property leases in Continental Europe and inflation rates. According to IPD, property income has performed well compared to government bonds and equities since the creation of the Eurozone in 1999, and the margin between them has widened further since the recession of 2008-09. Invista suggests that a key reason behind this relative outperformance is the fact that most Continental European property leases require rental payments to be indexed with reference to domestic Consumer Price Indices, typically on an annual basis.
Over the next 10 years, inflation is forecast to rise in most Continental European countries, with the exception of southern Europe where it is expected to decelerate below the levels forecast in Scandinavia and the Eurozone ‘Core’. Taking into account different lease structures and expected rates of inflation across Europe, Invista suggests that inflation-linked indexation will be a more positive contributor to total returns in markets such as France, Belgium, the Netherlands and Scandinavia than in Austria, Germany, Switzerland and southern Europe.
At the same time, Invista warns that in the short term, Eurozone inflation is subject to conflicting forces as the economy recovers from recession, and commodity prices and currency markets fluctuate. While the speed of the recovery in 'Core' countries such as Benelux, France and Germany has been encouraging, countries on the periphery, and in particular in the south, continue to struggle with structural issues and debt.