European property to yield 7% a year till 2019 – estimate

Office buildings1Investing in the European real estate market, excluding the UK, could yield 7% a year between now and 2019, according to new estimates.

A sudden cyclical recovery in markets such as Ireland, where the office rental market grew 13% in the second quarter, and the rise of southern European markets such as Spain will drive the returns, says Andrew Hook, manager of the Aviva Investors European Property Fund.

"The pricing of prime European real estate continues to be favourable compared with the declines in sovereign bond yields across Europe," says Hook, who adds that prime real estate is valued for its defensive qualities.

One of the main trends Hook identifies is the flow of capital towards property in the Benelux countries and in southern Europe, as competition for prime assets in London, Paris and the top-tier German cities intensifies. These second-tier markets are smaller but offer higher yields, he says.

Spain is tipped to perform particularly well based on its real estate sector turnaround so far this year, though structural issues must be overcome, such as high unemployment. Elsewhere, offices in Finland are likely to offer good yields, says Hook.

Aviva Investors is forecasting growth of 8.2% in the European ex-UK real estate market between now and 2016, after which it says growth will slow slightly to give an average of 7% a year until 2019.

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