Property could be the asset class to watch over the medium-term with rental growth set to deliver positive returns, reports Fidelity.

Investors who take advantage over the medium-term, despite consensus expectations for European rental growth being overly bearish, could benefit.

“Our analysis indicates there is scope for positive surprise in many prime European office markets, with particularly punchy rental growth in key financial centres,” commented Matthew Richardson, director of research at Fidelity Real Estate Investment Management.

“This financial centre leadership will begin to broaden out into other property sectors in 2011 when economic recovery gains momentum.”

European offices are expected to deliver rental growth of between 2.5 per cent and three per cent over the next five years on average, said Fidelity.

Fidelity’s optimism is counter to many commentators who are still gloomy on the outlook for rental growth, amid fears of a double dip recession. Prime headline office rates have reportedly fallen by over ten per cent in the last two years, and rental growth also remains negative across the overall market.

But Richardson said that these headline numbers ‘disguise’ the fact that rental prospects are rapidly improving in major business centres in northern and western Europe.

“The market’s pessimism on rental growth expectations over the next 12 months is well founded, but we believe market consensus over the medium term prospects is being overly bearish. Just as people over-estimate how long growth will continue in an upturn, so we think people are over-estimating how long zero or falling rental growth will continue,” Richardson said.

Richardson added that employment growth has been seen in the financial and business service sectors of London, Paris CBD and Stockholm CBD, and Fidelity’s analysis indicates a significantly lower chance of tenant default in the office sector. “Our projected 12-month failure rate for UK office tenants has fallen steadily since the second quarter of 2010 and is now 1.48 per cent compared to the UK ‘All Property’ average of 2.89 per cent.”

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