Strong economic growth in Europe should underpin the real estate investment market over the next couple of years, with demand for offices buoyed by the positive outlook for employment and retail property supported by sustained consumption levels, a recent Credit Suisse seminar in Amsterdam heard.
"The momentum in office property rents in Europe is picking up considerable steam. Most European office markets will likely show a renewed increase in rent prices towards the end of 2008, though disparities across the various national markets are enormous," Peter Dellsperger, Head of Real Estate Research and Portfolio Solutions at Credit Suisse, told the seminar.
Rental growth is expected to be the main driver of real estate investment returns going forward as the huge capital flows attracted into the market in recent years have pushed down European property yields (rent as a proportion of capital value) to levels where they are unlikely to fall much further, particularly against a background of rising interest rates.
With capital values now seen at their peak in the popular and overbought major European markets, total real estate investment returns should also trend lower, pushing some investors to diversify into more risky and niche markets to achieve their targeted returns.
Credit Suisse expects Paris and Stockholm to boast the strongest growth in office rents out to 2010, with main Central European and Italian cities lagging the European pack.
In retail property, Sweden, Spain, France and Portugal are forecast to be the market leaders for rent increases, while Germany, the UK and Austria are seen as the laggards. Generally high street shops are seen as the most dynamic investment sector, compared with shopping centres.
The total volume of capital invested in the European real estate market is set for another strong year in 2007, after record inflows estimated at €200 billion last year, and €156 billion in 2005, reflecting real estate's relative outperformance versus equities and bonds and growing institutional allocations to the asset class.