High investment demand from the US, Middle East and Australia as well as increasing cross-border activity means property markets are continuing to perform well across Europe. In particular, institutional investors within Europe are increasingly willing to invest in property markets outside their home country and this is driving demand.
Therefore, although investors’ appetite for European property is increasing, the expertise needed to seek out the best properties is equally high. The various European property sectors and regions can perform very differently and may not be closely correlated so investors need to exploit specific opportunities to generate the best returns.
In the UK, total returns of over 19 per cent are in prospect for 2006. This would match last year’s very strong result, despite some evidence of a slowdown in capital growth in recent weeks, which we expect to continue.
Over the medium term, UK returns will weaken as investor demand slows. Nevertheless, we expect annualised returns of over 7 per cent over the next three years. In an era of low interest rates and inflation these remain attractive returns for investors, albeit falling well short of the recent exceptional performance.
European property markets are projected to show average returns in the mid-teens in 2006 compared to 9.4 per cent last year. This has been supported by strong economic growth in the eurozone which overtook that of the US and UK in the summer.
Ireland and Spain are the European property hotspots likely to see the strongest returns across all three property sectors – offices, retail and industrial.
Industrial returns will be strongest in 2006, but retail will be the best performing sector in the eurozone over the next three years. With consumer confidence improving, retailers are increasingly looking for opportunities to expand.
There are great opportunities to achieve high returns in the UK and European property markets at the moment. However, investors need to consider how they can best access these returns. Investors should use long and short-term asset allocations to take advantage of the out-performing sectors and markets within Europe and often this may be best achieved by indirect investing through a pooled fund or fund of funds.
Karin van der Sluijs, fund manager, Arlington.
