Invista tips industrial to replace retail as outperforming sector

Industrial real estate will likely replace retail as the outperforming sector in Continental Europe, according to the latest research report produced by Invista REIM. This would be a major change as retail outperformed both the office and industrial sector in 2010 and played a large part in the improving property performance across the continent.

However, Invista expects higher income returns in the industrial sector will provide the foundation for increased total return performance.

Despite the challenging economic environment, Invista has identified two key factors responsible for the retail sector's strong property performance in 2010.

These were the increased investor sentiment towards retail property, reflected in the sector's share of total property investment turnover growing from 20% to 33% - according to CB Richard Ellis - during 2010, played a key role in generating retail capital growth; and the relative outperformance of retail rents compared with those in the office and industrial sectors in both prime and secondary areas of the property market. For example, prime euro zone high-street retail rents fell by only 2.9% compared to 7.6% - based on CBRE figures - recorded for offices and 8.4% for industrial properties.

As consumer spending growth decelerates, Invista predicts retail rents will come under pressure in 2011 and beyond. Pressure on spending is expected to come from falling wage growth, the need for consumers to reduce their borrowings, unemployment levels remaining high and the likelihood that interest rates begin to rise. Furthermore, according to Property Market Analysis 'PMA', shopping centre development activity is picking up again which Invista believes could lead to increased supply and possibly contribute towards the softening of retail rents.

Invista expects capital growth in the commercial property markets of continental Europe to be subdued in the next few years, making the income component of total returns a more significant contributor to outperformance. The report therefore highlights that properties and sectors which enjoy relatively high and stable income returns provide a solid basis for outperformance.

Tim Francis, director, Continental European Strategy & Research at Invista, commented: 'Recently we have seen higher total returns for the retail sector, however, over the next five years the sector will come under pressure. With consumer spending being affected by a number of headwinds and given the lack of rental growth generally, in most countries we are more positive about the higher yielding industrial sector over retail.'