One of Europe's biggest investment players has increased its forecast on the size of returns from the region's property markets over the next half-decade.

UK-based Aviva Investors, which has a total of £240 billion of assets under management, has pushed up its five-year annual total return forecast on European property to 8.6 per cent, arguing that ultra-loose central bank monetary policy should support price growth.

The asset management house said its new forecast is 0.7 percentage points above where it saw European property market returns just three months ago; it does, however, expect annual returns to hit a ceiling in 2015.

The German retail and industrial sectors are attractive, along with Swedish retail and Finnish offices, the firm said.

“The pricing of prime assets may be expensive by historical standards, but with Europe facing a prolonged period of weak growth and very low inflation punctuated by bouts of deflation, we prefer high-quality assets in core markets as they offer significant income security. Finnish offices, Belgian and German industrial properties, and the German and Swedish retail sectors, appear especially attractive on a risk-adjusted basis,” Chris Urwin, global research manager at the firm, said in a note.

The fall in the euro exchange rate against a number of major currencies is also likely to be good news for higher property returns in the region, Urwin said.
 
“The plunge in the euro against a basket of other currencies may attract more holidaymakers to the currency bloc in 2015. That could improve prospects for the hospitality and retail sectors in key tourist cities,” he said.

Foreign exchange effects can sometimes be difficult to capture; much depends on when any investment returns made from investing in property that is denominated in a particular currency are converted back into another one. Some currency swings over recent years have been dramatic. For example, between 3 March this year and two years before, sterling has surged 107.3 per cent versus the Russian rouble. When compared against the Norwegian Krona, sterling is up 36.9 per cent more, and the corresponding figures for the Australian dollar, South African rand and US dollar are 33.5 per cent, 32.0 per cent and 2.2 per cent respectively.

“Although the eurozone’s economic recovery will remain quite sluggish, the outlook for prime continental European real estate has improved after the European Central Bank eased monetary policy. We now have more conviction that interest rates will remain even lower for even longer, so property yields still look relatively attractive. Capital inflows hit a new high in 2014 and this year we expect these to remain strong,” Urwin added.

Late last week, Deutsche Asset and Wealth Management, in its monthly view on Europe, said it expects real estate to continue to hold a positive return outlook for long-term investors; it sees the market moving sideways at the present time.