Research article

Outlook: the impact of a low interest rate environment

How will a low interest rate environment affect investment volumes and yields?

A low growth environment presents challenges and opportunities for European real estate investors. We expect traditionally 'alternative' sectors to come to the mainstream as investors increasingly search for long, secure income. The weight of money targeting European real estate will keep yields low for the foreseeable future and we feel that the underlying risk of holding property ahead of bonds has not materially changed, which will continue to keep the yield spread with bonds stable. Rental growth, rather than capital growth will be the main driver of returns in 2020.

However, with negative government bond yields, multi-asset managers will increasingly consider the property risk premium against holding cash, rather than government bonds in 2019. With debt so comparatively cheap across Europe and office occupational markets remaining tight, we believe there is an opportunity for property companies willing to take on development risk to secure long income and sell on to institutional landlords.

Geopolitics will also be an influential factor in investment decision-making, as European economies become more exposed to exogenous global shocks. The more risk-loving investors will be paying close attention to the impact trade wars have on exchange rates and will time their real estate acquisitions accordingly.

Savills analysts forecast office yields to move in over the next 12 months in Belgium, Czech Republic, France, Greece, Italy, Romania and Sweden supported by resilient investor interest. This has been supported by strong rental growth forecasts of 3.8% for the full year across Europe’s CBD offices, although some softening of yields is expected in the UK and Portugal office markets.

Looking forward over the next 12 months, further industrial yield compression is expected across the Czech Republic, France, Germany, Greece, Italy, Portugal, Romania, Spain and Sweden. All other markets industrial are forecast to remain stable.

Conversely, some softening of yields in the retail sector is forecast in Belgium, Czech Republic, Ireland, Norway, Portugal, Spain and UK markets. Romania is the only market forecasting any inward movement of yields in the retail sector in the next 12 months as a mismatch between buyers and sellers expectations continues.

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