SWIP conducted research into the European real estate market and expects the Western European commercial property market to produce average total returns of over 8 per cent over the next five years, compared with forecasts returns of around 7 per cent from the UK commercial property market.
SWIP expects the warehousing sector to provide the strongest performance over the next five years, followed by retail and then the office sector, although the gap between retail and office returns is narrowing. This is in contrast to the UK market, where office property is expected to lead the market over the next five years.
SWIP has forecasted average annual total returns of over 10 per cent across the Western European warehousing markets over the next five years. Over the short-term, Central Europe, Spain, the Nordic markets and France are forecast to see the fastest rental growth. The Central European warehousing market saw particularly strong demand last year with take-up in some markets up by almost 50 per cent from 2004 to 2005.
Total returns for the retail sector are forecast to moderate at around 6-10 per cent per annum (p.a.) in Western Europe and 10-14 per cent p.a. in Central Europe. Retail trade confidence has improved since the end of 2005 and is now stronger than last year and above the long term average. Investor demand for retail real estate also remains very strong and a significant inward yield shift over the past year continues to drive capital value growth.
High returns in the office sector are unlikely to be reciprocated in the medium term as most European office markets have already witnessed significant yield compression. However, moderate rental growth and stable yield profiles should result in healthy returns in most office markets. SWIP expects total returns in the European office sector to be around 8-10 per cent p.a. between 2006 and 2010, as rental growth replaces yield compression as the principal driver of returns. Among the major markets, Hamburg, Helsinki, Dűsseldorf, and Munich are expected to show strong returns.
Ian Hally, head of property research at SWIP, commented: “The European real estate market has seen record volumes of transactions in 2005 as strong returns and diversification benefits have increased the attractiveness of real estate as an asset class. Over the medium term, we expect returns in the European market to be driven by rental growth, providing an average annual return ahead of our forecasts for the UK property market, where we expect returns to average around 7 per cent. Improved transparency and the harmonising of legal and reporting regimes across Europe have improved the accessibility of the real estate market. As a result, investors are increasingly looking at Europe as a single real estate market with convergent return prospects.”
