Invesco Real Estate believes that the Central and Eastern European markets are forecast to deliver the strongest medium term returns on the back of +3% GDP growth. However, a combination of bond rate movements, globalization of capital flows and increased development pipeline are expected to push some prime Western European yields outwards over the next five years.
These findings are highlighted in the Invesco Real Estate spring 2011 House View Report, which is launched today. The in-depth market outlook highlights a number of key themes Invesco Real Estate believes will be central to real estate investment in the upcoming year.
Economic outlook for real estate investment
Greater differentiation between European countries is expected in the short-to-medium term, with Germany, Switzerland and the Nordics continuing to out-perform with GDP growth in the 2.5-3% range. Within the core European countries such as France and the Benelux, growth is expected to be slower, within the range of 1.5-2%.
Invesco Real Estate highlights that the UK and Italy sit between the struggling economies and those at the core, with GDP growth of between 1-1.5% expected. Meanwhile, the Mediterranean economies and Ireland are forecasted to struggle with GDP growth of less than 1% as the process of deleveraging continues.
Buoyant real estate sectors
We believe the office sector will deliver the best short-term returns in supply constrained city centers, whilst in the medium-term the retail sector is expected to be the strongest performing asset class, supported in Central and Eastern Europe by a burgeoning and wealthier middle class. However, short-term performance in the retail sector is likely to be weak as austerity measures weigh on consumer confidence. Logistics will continue to play an important role within portfolio strategies as a provider of stable income returns in Invesco Real Estate's view.
Simon Mallinson, Invesco Real Estate's European Research Director, commented: "Our investment team believes that 2011 will offer numerous opportunities to deploy capital into European real estate with the potential to deliver attractive returns over the next five years. Although Southern European markets are expected to struggle in the short to medium term, we expect Central and Eastern European markets will provide an attractive real estate investment opportunity and record the strongest medium term GDP growth."
Simon continues: "Key to securing value growth is the under-writing of investments, based on lease structures and rental growth prospects, with yields expected to move outwards in the medium term."
Source: Invesco Real Estate