45% of European real estate markets still offer attractive risk-adjusted returns over the period 2007 to 2011, according to property fund manager Invesco Real Estate.
In the spring edition of its twice-yearly European Real Estate Review Invesco suggests that improving GDP growth, particularly in Germany, limited inflationary pressures and relatively subdued development activity should ensure "robust rental appreciation" and "minimal outward yield shift" over the next five years.
Paul Kennedy, head of European Investment Research at INVESCO Real Estate, said, "We continue to anticipate attractive total returns from a substantial proportion of the European real estate market over the five years from 2007. Although we expect returns to be lower than over the recent past, we do not expect performance to disappoint. With appropriate market and stock selection, European real estate should continue to deliver an attractive premium over government bond yields. However, while recent returns have been dominated by capital growth from yield compression, performance over the next five years will be delivered mainly through income."
The European Real Estate Review says that occupier demand is still expected to strengthen on the back of improving GDP growth and falling unemployment. Meanwhile, inflationary pressures are likely to remain under control and, although long government bond yields should increase, changes should be relatively small.
Although there are signs of accelerating development activity in some real estate markets (e.g. City of London offices and UK retail) and the potential for expansion remains significant in other locations (e.g. Madrid offices), supply side pressures remain relatively benign.
Furthermore, Invesco believes that current real estate prices are appropriate, especially given improving rental growth prospects and the relatively stable outlook for long government bond yields.
Kim Politzer, European Research Manager at INVESCO Real Estate, said, "In our view, the office sector is likely to out-perform the rest of the European real estate market, at least for 2007 and probably over 2008. The best risk adjusted returns are likely to be achieved from Paris, regional France, Brussels, Madrid, Stockholm, London Docklands, Prague, Moscow, St Petersburg and Bratislava. Strong cyclical short-term rental growth means that returns from Madrid, Barcelona and the City of London are likely to be more attractive over three years than five. Key risks for underperformance include Berlin, Rome, Milan, Amsterdam, Rotterdam, Dublin, regional UK (excluding the M25 West market) and Budapest."
"On the negative side, renewed oil price inflation, perhaps triggered by further political problems in the Middle East, could undermine the benign outlook for prices and, therefore, bond yields. Higher bond yields that are not offset by improved GDP growth could undermine real estate capital values and, therefore, reduce available returns."
"There is also a potential threat to the competitiveness of European exports as the risks associated with US current account and balance of payments imbalances remain and could lead to further US dollar deterioration. The resultant reduction in European export growth would probably lead to lower GDP growth, particularly for Germany and the Netherlands," Politzer said.
Source: Invesco
