M&G Real Estate: Continental Europe offers strong returns

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The latest Continental Europe market Outlook published by M&G Real Estate, one of the world’s largest property investors, expects strong returns into 2017.

Despite elections in the Netherlands and France in the first half of the year, the Outlook notes that consensus forecasts for Eurozone GDP suggest only a modest slowdown to 1.6% in 2017 (down from 1.7% in 2016).

It points to positive sentiment being 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 decision by the European Central Bank (ECB) to extend its Quantitative Easing (QE) programme to the end of 2017.

Slower rental value growth than expected

In the Eurozone occupier markets, 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.

As the first sector to recover in the European cycle, the Outlook states that retail rents are the most likely to stabilise ahead of other sectors. 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.

M&G Real Estate states that this view is supported by structural ecommerce and reshoring trends. It expects the European industrial sector to generate 1.2% per annum average rental growth over the next three years.

Weight of capital to see yields move lower

With real estate offering attractive spreads above bonds, the Outlook states that the political outlook across Europe is clearly not dissuading investors from allocating capital to the asset class.

M&G Real Estate notes that prime property yields are already at historic lows. However, given the attractive spreads versus 10-year government bonds, it does not believe that prime real estate yields have found a floor yet.

At the all-property level, it states that the weight of capital chasing core assets will see yields move lower, by around 10 to 20bps at an aggregate European level.

Vanessa Muscarà, Associate Director, M&G Real Estate, said: “The strength of occupier markets in German and Spanish cities, as well as Stockholm, are likely to offer the greatest office rental growth prospects.

“We also expect the long-term prospects of key logistics markets to continue to be boosted by structural, ecommerce and reshoring trends, with the sector set to achieve total returns above historic averages in the medium term.

“With the ECB having extended its Quantitative Easing (QE) programme to the end of 2017, re-affirming its commitment to continued bond market support, coupled with the weight of capital driving down yields, we expect continued strong returns across Continental Europe real estate over 2017.”