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STOCKHOLM-Property markets in Europe have reached a turning point and the performance outlook continues to recover, largely driven by improving capital market conditions, says Aberdeen Property Investors. It raised the five-year average total return forecast for all property in the eurozone to 6.7% from 6.4% foreseen last quarter.

In its latest quarterly report, Aberdeen said property now looks cheap from an historic perspective and relative to other asset classes. There is mounting pressure on prime yields to come down, particularly given the wide gap in property yields relative to equities and real bonds. This process has already started in leading markets such as London, Paris and Oslo, where prime assets in particular are in strong demand. “Although occupier market conditions are still weak, the pace of decline regarding tenant demand no longer seems to be deteriorating in many markets, and there is the ‘risk’ that office rental growth may come back sooner rather than later,” it said. “Outside the prime areas, the situation is quite different. Demand for secondary property is relatively low and secondary yields are stabilizing at best.”

Office yields are likely to compress a little more than retail yields in 2010, due to the more cyclical nature of office markets and also due to stronger price correction in many office markets across Europe. In terms of capital value decline, most European markets will bottom out between late 2009 and end-2010.

“The timing for investors to increase exposure to European property is actually very good now,” commented Aberdeen’s Western Europe Research Director Gert-Jan Kapiteyn. “However, investors will have to rely less on leverage as a driver of performance .. as banks will be less willing and able to provide cheap finance. Less gearing .. will also help institutional investors, of whom many are looking for the liability hedging qualities of property investing: high income returns, return stability, inflation protection and portfolio diversification.”

The report said that in geographic terms it continued to favor property markets in the UK and the Nordics. The stability of returns in key countries such as Germany and France also look attractive in the context of volatile economic conditions. The Russian property market, although being significantly more risky, is excepted to become more attractively priced next year, while southern and central Europe are expected to underperform in the short term.

Allan Saundersonis a managing editor of Property Finance Europe and a contributor to GlobeSt.com.

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