The logistics sector is expected to provide the strongest prime total return in continental Europe this year, according to M&G Real Estate.
In its Continental Europe Real Estate Market Outlook, the fund manager says the logistics sectors offers more scope for investors to benefit from both a higher income return and capitalise on potential further yield compression.
It draws a comparison with core offices and high street retail, where it says prime yields are at or close to recent lows in many markets.
M&G predicts the principal logistics hubs – Germany, the Nordics and the Netherlands – will attract positive performance driven by a combination of stronger occupier and investment demand.
It adds that, interestingly, Poland’s proximity to export-led Germany will provide indirect benefits particularly when seen in relation to the rapid growth of e-commerce.
Looking at the occupational markets, the highest rates of rental growth over the next five years are likely to come from prime high street shops continuing the recent trend.
M&G says rental growth in the office sector is likely to be moderate.
In the very core office markets of Stockholm and Munich, where rental growth has been strong, supply and demand are expected to be more in balance, leading to modest rental growth.
Away from the core, particularly in southern Europe, where unemployment rates are extremely high, occupational demand is still subdued and we may yet see further rental weakness, beyond prime property in particular.
It adds that in the prime industrial sector, it expects rents to recover to pre-recession levels over the next five years as the overall supply pipeline is suppressed and demand indicators are strong.
Looking more broadly at investor attitudes, the report found that the appetite for risk is set to keep rising this year and next as the eurozone economic recovery begins to take place.
It expects this to fuel strong investment and real estate transaction volumes across the continent in 2014 and into 2015.
This growth, combined with an expensive bond market and the prospect of interest rate rises impacting bond returns, means investors are likely to continue to increase real estate allocations.
Although there are significant challenges, not least high debt levels and relatively weak labour markets, the eurozone is scheduled to see 1% real GDP growth over 2014.
This helps lay strong foundations for a return to “more normal rates of economic growth in the medium term”, according to Richard Gwilliam, head of property research at M&G Real Estate.
He says: “A ‘risk on’ investment sentiment does not mean ‘brain off’. We are not going to see significant rental growth across the board: it will be focused in the North primarily in Germany and the Nordics. Furthermore, we are also predicting further yield compression owing to increased investor appetite.
“The lack of supply in prime industrial real estate will encourage strong growth returning rents to pre-recession levels within the next five years.”
bridget.o’connell@estatesgazette.com
