European real estate looks attractive after Brexit but political risks remain
We forecast total returns on continental European real estate of 4.6 per cent per annum over the next five years amid weak supply and strong demand from yield-hungry investors, combined with recovering rents.
The UK’s vote to leave the European Union (EU) on June 23 should have a limited impact on the European economy and its real estate occupier markets. Economic growth is likely to slow modestly because of trade linkages but we expect it to remain above-trend, supported by the European Central Bank’s (ECB) expansionary monetary policy. This is subject to no political contagion taking place in other parts of the EU.
Meanwhile, the expectation of further activism by the ECB, aimed at soothing market nerves following the UK referendum, has resulted in historically low bond yields (see chart). This will have a significant impact on real estate investment markets. The bank is likely to hold interest rates even lower for even longer and to extend its quantitative easing programme. The wider-than-expected spread to government bond yields will further improve the attractiveness of European real estate and entice investors to the asset class, leading to higher returns in 2016-17 as additional capital growth boosts performance.
We forecast particularly strong returns of 12.3 per cent on European property this year. The forecast for mid-2016-mid-2021 is 4.6 per cent per annum. Income will be the main driver of returns over the period, with the boost from capital growth in 2016-17 fading thereafter. Income returns will be driven by a tight supply of space as development remains subdued, as well as rising occupier demand on the back of ongoing improvements in the economy.
Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 23 August 2016. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. 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.
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