Investment director of real estate at Fidelity Worldwide Investment Adrian Benedict said a dislocation of risk perception between tenanted properties in Western Europe and corporate bonds has created an opportunity for institutional investors.
Fidelity executives said long-term investors should consider second tier properties on the fringes of central business districts over prime property.
Benedict said secondary yields have opened up a significant spread over prime and investment grade. He said high-quality well-tenanted properties are at yield levels similar to those on high bond yields.
"Tenant quality is still very high, so for little discernible increase in risk, investors can expect to achieve attractive rates of five-year target returns within the 8-11 per cent range," Benedict said, adding prime was 6-8 per cent.
He said Western Europe offered particularly good returns.
Head of real estate research at Fidelity Matthew Richardson said "commercial real estate would be one of the most obvious investments to make this year".
According to Richardson, second tier assets can provide a combination of secure high initial yields and the prospect of rising capital income over the next 12-18 months.
He said supply and demand dynamics were conspiring to create a favourable returns environment for investors.
An adverse appetite for development risk due to a previous debt-driven boom has led to supply side tightness in much of the prime Western European centres.
But a lack of tenant distress meant demand is still strong and rising in some core property markets and causing upward pressures on rents, Richardson said.
"Given low tenant default risk on a high-income producing assets, the opportunity to invest in second tier properties at yields close to those on high-yield bonds looks a particularly attractive opportunity," he said.
