Stronger occupier markets to cushion blow of rising bond yields

For European commercial property markets outside of the currency union, occupier conditions appear to be strengthening gradually, while investment markets have cooled. We expect these trends to continue. Broadly speaking, we think that steady but unspectacular growth in economic activity will support an accelerating profile of rental value growth over the next five years in both Western and Eastern parts of non-euro-zone Europe. But we see little prospect for yields to make a positive contribution to capital value growth. In Western markets, although property yields still offer wide spreads over risk-free rates, these will be reduced drastically once market interest rates normalise, putting upwards pressure on investors' required property yields during 2015-2018, and downwards pressure on capital values. More positively, there would be less need for Emerging European property yields to rise, meaning that the gentle upward trend in capital values of the past couple of years is likely to be sustained over the next five.