Continental Europe still offers strong returns on investment, despite political uncertainty, according to a new outlook published by M&G Real Estate. 

Eurozone gross domestic product is forecast to modestly slow down to 1.6% in 2017, down from 1.7% in 2016.

The outlook suggests Europe's rental value will grow more slowly than previously expected for a period, but the report highlights the strength of Spanish and German cities and Stockholm.

Tight development pipelines will continue to boost office rental growth in many markets and, overall, the European office sector is expected to generate 1.7% per year average rental growth over the next three years.

Retail rents are likely to stabilise ahead of other sectors, according to the report. M&G Real Estate expects the combined European retail sectors to generate 2.6% per year average rental growth over the next three years.

The outlook states that the short-term political backdrop and uncertainties over the outcome of trade negotiations following Brexit are unlikely to significantly affect the long-term growth prospects of the European logistics sector.

M&G Real Estate associate director Vanessa Muscarà said this view is supported by structural e-commerce and reshoring trends. It expects the European industrial sector to generate 1.2% per annum average rental growth over the next three years, and will achieve total returns above historic averages in the medium-term.

With real estate offering attractive spreads above bonds, the outlook states the political outlook across Europe is clearly not dissuading investors from allocating capital to the asset class.

M&G Real Estate notes that prime property yields are already at historic lows. However, given the attractive spreads versus 10-year government bonds, it does not believe that prime real estate yields have found a floor yet.

The weight of capital chasing core assets will move yields lower across property types, by 10 to 20 basis points at an aggregate European level.