CAPITAL VIEWS WHAT NEXT FOR EUROPEAN PROPERTY INVESTMENT

Risk and volatility will be with us throughout 2017 but real estate should still have the wind at its back, at least for the best assets and locations. Across Western Europe, we expect prime yields to fall 30- 40bps, rents to edge up 2-3% and European investment volumes overall to rise 6% as profit taking frees up opportunities.

Uncertain Uncertainties

As we see from Table 1, page 3, some of the uncertainties we face in 2017 are now known but that doesn’t make them easier to read and if 2016 was eventful, the coming year promises more of the same! Trump’s actual policies rather than rhetoric will be influencing markets while banking instability lingers in Europe and could yet emerge in China. At the same time, the French and Germans, amongst others, go to the polls in elections with deep implications for the strength of the EU, the Eurozone and more besides.

Lower for longer but not forever

Policy normalisation has begun and whilst it is too early to call an end to lower for longer interest rates, it is clear the cycle is turning – and turning much more rapidly in some countries than others. Indeed, with a growing inflation risk, increased populism, and lesser pressure for reform, the risk of instability in the Eurozone will tend to push up bond yields further. This could accelerate demand for real estate as a steady higher income-producing asset with growth potential. What’s more, it does not stand in the way of further yield falls in some markets given the attractive spreads between real estate and long-term bonds.