European commercial property is set to deliver total returns of 19 per cent this year, the highest since 25 per cent was recorded in 2006.
The forecasts, produced each quarter, cover 121 European markets, focusing on the three main commercial sectors (office, retail, industrial). Retail is forecast to be the best performing sector, with returns of 22 per cent expected this year, followed by office and industrial (both at 17 per cent).
Despite the world economy losing some momentum in September, and concerns over the outlook for emerging markets and their impact on European economies, confidence in European real estate remains high. The low interest rate environment, ECB QE and strong investor interest are keeping commercial property yields under downward pressure. During the third quarter of 2015, yields fell in 43 of the 121 markets covered by Cushman & Wakefield’s forecasts.
Yields are expected to stay lower for longer and Cushman & Wakefield forecasts that yields will decline in 43 markets in 2016, while levelling off in all other markets. However, slower yield compression means that European all property returns are predicted to slow to 9 per cent in 2016. Cushman & Wakefield predicts that industrial property will be the best performing sector over the next five years due to its higher yield and income return.
Looking at individual markets Dublin retail is forecast to deliver the highest return in 2016, of nearly 30 per cent, as strong investor interest pushes yields below 4 per cent, while a firm consumer sector of the economy sees rents rise 17 per cent. The other top performers for 2016 include Dublin offices, with returns of 16 per cent predicted, Warsaw retail (15 per cent), London City offices (15 per cent) and the Madrid and Barcelona office and retail markets (all 14 per cent).
In the occupier market reasonable growth in most European economies is forecast to filter through to modest rent rises this year, which is forecast to continue into 2016. European commercial property rental growth is forecast to average 3 per cent next year.
Fergus Hicks, Associate Director at Cushman & Wakefield Research, says: “Ongoing low interest rates are seeing sustained high levels of investor demand for European commercial property and yields remain under downward pressure. In many markets we expect yields to fall further next year, but by year-end we expect yields to be levelling off. Overall, we think European commercial property returns will remain healthy in 2016, although slow from 2015.”
At a European level, Cushman & Wakefield expects commercial property rental growth to remain modest in 2016. Most European economies show positive, albeit unspectacular, growth and occupiers are becoming more confident and want more space. Economic recovery should help to keep rental growth in positive territory over the medium term though.
Mark Unsworth, Senior Consultant at Cushman & Wakefield Research, says: “We expect periphery markets within the Eurozone to deliver the highest returns in 2016, with Dublin retail predicted to deliver returns of nearly 30 per cent. In the Madrid and Barcelona office and retail markets we expect further falls in yields and reasonable rental growth to push returns to around 14 per cent in 2016. Over the medium term, though, we see the highest returns coming from the Baltics and CEE regions due to more favourable yield movements.”
Source: Property Funds World