Future outlook

The credit crunch has already contributed towards considerable tightening of monetary conditions, which is having an impact on the property market. Rental growth projections have been marginally revised down as a result of both a slight slowdown in European economic growth and the fact that in a number of markets rental growth rates have been strong for some time. This is beginning to prompt a supply-side response, thereby diluting the potential for future rental growth.

Regarding yields, the scope for further yield compression has been significantly exhausted in the majority of European markets, although there are still some markets, such as the emerging markets of Turkey and Russia where there may be further compression due to rental growth.

In terms of total property returns, Experian forecast that the industrial sector will produce the best returns in 2008, followed by the Office and Retail sectors. In the logistics market, the best performers tend to be those regions that have supply limitations sufficient to generate some real rental growth. France, Sweden, Poland and Finland are the countries where rental growth is expected to be robust. The strongest office market returns are those markets that have been last to recover while in the retail sector, the best markets are those where consumers have the lowest level of domestic debt and where the development pipeline is not yet fully evolved. Based on these returns, the European market is expected to be one of the strongest global real estate markets, which should enable it to continue to attract investment from abroad. Furthermore, in an environment where investors will increasingly be prepared to accept lower returns, the returns forecasts for European property look attractive.