Undersupply, light development pipelines and rental growth can offset any upward pressure on property yields caused by rising bond yields, according to AEW Europe.
The investment manager’s head of research, Sam Martin, said although rising government bond yields will put upward pressure on property yields over the long term, mitigating factors will partially or fully offset this negative yield shift.
Speaking at AEW Europe’s economic briefing at London’s Centre Point, Martin said there were a number of property and non-property factors that would place downward pressure on property yields.
Alongside undersupply and rental growth he also pointed to increasing investment volumes driven by higher allocations to real estate and increasing debt as placing downward pressure on property yields.
Furthermore, he added that even if rising government bond yields did push up property yields, they were unlikely to have any great negative impact on property total returns, as income – which has become a larger part of total returns – will compensate as rents rise.
He added that much lower yielding properties would show rising yields first, so it made sense to invest in higher yielding properties “in unloved corners of the market”.
These would require expert stock picking to find assets with strong rental growth prospects and would require good asset management.
He identified deflation as the greatest threat facing the European real estate market at present.
Responding to a question about what they thought likely to have the greatest impact on the market in the short-term, panelist Ian Marcus, senior consultant at Eastdil Secured, said there were risks around political interference ahead of the election.
Land Securities chief executive Rob Noel identified changing occupier requirements as a threat to those who didn’t respond.
bridget.oconnell@estatesgazette.com
