M&G Investments [Real Estate - Europe]

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M&G Real Estate

European long lease real estate: a defensive alternative

As growth in the European economy continues to broaden out across the region, we anticipate growing demand from institutional investors to not only secure attractive income in a low-yield environment, but to protect the real value of those returns over the long term. Inflation linked assets that may help cushion returns against interest rate rises continue to attract investor interest, helping secure protection against changes in the economic climate.

Most European markets are now firmly in expansion mode and while there has been strong occupier and investor demand for prime assets, yield compression in core cities has begun to slow. Expectations are for interest rates to remain low in the medium term, with a rise not anticipated until the latter part of 2019, and there is significant uncertainty on the direction of future policy.

At a time when the medium-term outlook for European real estate is for returns to be driven by income and rental growth rather than capital growth from yield compression, long lease real estate has the potential to offer a lower-volatility alternative thanks to its longer contracted lease terms and rent reviews linked to inflation.

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