Prime shopping centres will become European real estate's most attractive sector in 2022.

So said global real estate investment manager AEW, as it looks at ways investors can realign their portfolios in a post-Covid-19 world with bond prices and monetary policy in flux, and inflation rising.

Prime shopping centres are projected to have the highest returns (7.4% a year) of any sector, due to their attractive current yields and projected rising values. AEW said the sector looks good in its base-case assumptions, and also if it makes gloomier projections about inflation.

Prime shopping centres are winners because their yields have widened over the past two years.

Shopping centre and high street retail yields have widened by over 120 and 50 basis points, respectively, since 2018 and due to this past repricing, their yields are forecast to tighten by 2026 by 30 and 15 bps, respectively.

AEW’s inflation scenario shows consistently lower returns across all sectors compared to the base case, due to its implied yield widening over the next five years limiting capital appreciation. Residential will come off worst, AEW reckoned.

“Our base case analysis indicates that we could see a strong recovery in retail, specifically prime shopping centres. In fact, shopping centres emerge as the most attractive asset class across our European property markets on a risk-adjusted returns basis,” AEW Managing Director and Head of Research Hans Vrensen said.

“Until recently, the consensus was for inflation to settle down, but investors have already priced in a hike in interest rates and a tapering of quantitative easing by central banks. In other words, we need to consider what the impact will be from higher inflation, even if lower for longer interest rates remain our base case."

"If it endures, a new higher inflationary environment has consequences for real estate investors. In that case, we would expect rising interest rates and bond yields to restrict capital value growth across the board."

Earlier this week two of the UK’s largest shopping centre landlords reported encouraging signs of revival.

Half-year results at both Landsec and British Land indicated that rents and values were starting to stabilise, and Landsec said it was considering starting to buy in the sector once again.

Both companies reported rents and values falling in the six months to the end of September. At Landsec, like-for-like rents fell 1.8% and the value of its regional shopping centres fell 4.1% to £979M. At British Land, rents fell 2.7% and values 4.2%. The encouragement is that the rate of change appears to be slowing.

Landsec said the company was signing retail leases 3.3% ahead of ERVs, and that the majority of the valuation falls had been in Q1 (March-June), with yields stable in Q2.