Prospects for prime real estate strengthen as the European Central Bank eases monetary policy and government bond yields hit record low.

February 2015

Key points

  • Five-year all-property return forecast raised to 8.6% a year, peaking in 2015.
  • Interest rates more likely to be lower for longer, so real-estate yields look attractive despite sharp rise in prices last year.
  • Prime assets in core markets offering secure income look particularly attractive.
  • Weak inflation outlook dampens rental growth prospects.

Property looking an even better prospect

The outlook for prime continental European real estate has improved after the European Central Bank eased monetary policy. Bond yields, already at record lows, are likely to remain lower for longer than anticipated under the influence of ‘quantitative easing’ (QE). That makes the relatively high yields offered by property even more attractive. We expect capital inflows, which hit a new high in 2014, to stay strong.

Forecasts upped

Although the Eurozone’s economic recovery will remain sluggish, long-term prospects are slightly better after a sharp drop in energy costs and the likely impact of QE.

Prime real estate should therefore generate attractive levels of income, particularly relative to government bonds and other low-risk assets. Lower bond yields mean more scope for property yields to fall: we don’t expect them to trough before 2018.

Peak in annual returns

With prices set to rise, we expect all-property total returns in continental Europe to be higher over the next five years than envisaged three months ago. We anticipate annual total returns of 8.6% a year over the period, up 0.7 percentage points on our previous forecast. However, growth in annual returns is likely to peak this year.

Prime real estate should generate attractive levels of income, particularly relative to government bonds and other low-risk assets.

Weaker inflation slowing rental growth

The impact of weaker inflation on rents marginally dampens our forecast for rental growth in the short term. We expect income growth of 2.7% a year in the 2015-19 period. However, with lower oil prices set to boost consumer spending, rents should hold up fairly well in the retail sector.

Prime assets appeal

Prime assets in core markets look to offer decent value. Finnish offices, Belgian and German industrial properties, as well as the German and Swedish retail sectors, appear especially attractive on a risk-adjusted basis. The plunge in the euro against a basket of other currencies may attract more holidaymakers to the currency bloc in 2015. That could improve prospects for the hospitality and retail sectors in key tourist cities.

Income security in core markets

The Irish market still offers some value on a risk-adjusted basis, but far less than a year ago following a rapid rise in prices in 2014. But rents are only likely to recover gradually in Spain and Italy, so these markets look less attractive. With Europe facing a prolonged period of weak growth and very low inflation, punctuated by bouts of deflation, we prefer the significant income security of high-quality assets in core markets. 


The pricing of prime assets may be expensive by historical standards. Nevertheless, we believe that interest rates will remain even lower for even longer and property yields still look relatively attractive. While more optimistic about the outlook for prime real estate, the prospects for secondary assets have worsened due to the risk of a further fall in occupancy rates. That said, higher quality secondary assets in Germany and the Nordic region should do better.


*The return figures which are illustrated above are forecasts which may or may not be achieved. The forecasts are based on internal business plan models and are provided for information purposes only. The value of an investment can go down as well as up and there is no guarantee that the forecast returns will be achieved.


Important information:

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 3 February 2015. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. 

Where funds are invested in real estate/infrastructure, investors may not be able to switch or cash in an investment when they want because real estate/infrastructure may not always be readily saleable. If this is the case we may defer a request to switch or cash in units. Investors should also bear in mind that the valuation of real estate is generally a matter of valuers’ opinion rather than fact.

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