Rental growth to start driving relative market performance

We see euro-zone GDP growth slowing this year due to the drag from higher inflation and political uncertainty. With no monetary policy tightening on the horizon, further falls in prime yields will continue to drive capital values higher over the next two years. However, the ability of a market to generate rental growth will start to play an increasingly important role in differentiating between the best and worst performing cities. Although we think that there is still scope for prime property yields to fall further, we expect those declines to be far smaller than in recent years. At the euro-zone all-property level, compared to the 62bps fall in 2015 and 31bps fall last year, we are only forecasting a 27bps cumulative decline over the next two years. Nonetheless, this will still drive capital values higher, before becoming a headwind towards the end of the forecast period. Indeed, we forecast capital values to start declining in 2020.