Aberdeen Property Investors is forecasting total European property returns of 11% in 2006, 80 basis points below the record levels achieved in 2005.
The property investment company reports yields being driven down due to strong investor demand with direct commercial property investment transactions expected to reach a record €200bn (£134bn) compared to €155bn (£103bn) last year.
However the company, a specialist division of Aberdeen Asset Management, does not expect further yield compression after a period of rapid decline across all European markets and sectors plus an interest rates rise.
Property returns, which will increasingly be driven by income growth, are also expected to weaken in 2007 due to the much more limited potential for rising capital values.
Ireland, the Netherlands and Norway are expected to deliver the highest all property total returns with Germany expected to continue to be the weakest performing country.
However, the company anticipates an improved performance from Germany with total all property returns increasing to 4.6% this year compared to 0.5% in 2005.
The company reports a recovery of most European office markets, with lower vacancies, higher levels of gross take-up and rental growth.
London, Barcelona, Madrid, Dublin, Paris and Oslo are the cities with especially strong office rental growth so far this year, with Brussels, Amsterdam, Milan and several cities in Germany the worst performing office markets in terms of rental growth.
The European retail sector continues to perform very well with rental growth prospects generally rated more positively than offices. The strongest development activity is occurring in Italy, Finland, Spain and Poland.
References: EGi News 23/10/06
