The red lights are not flashing in Europe, but over the medium and long term there are clouds on the horizon, delegates heard at the PropertyEU European Real Estate Risk Management Briefing which was held in London on Thursday at the City offices of Paul Hastings.
With the exception of the UK where the referendum on EU membership is looming, the short-term risks are limited, said Mahdi Mokrane, Head of European Research and Strategy at LaSalle Investment Management. ‘There are few causes of concern over the short term, a lot less angst than in 2015. We do not see any serious risks in the next 12 to 18 months, except in the UK where uncertainty over the outcome of the referendum has led to outflows.’
Unlike last year, the equity markets have not been tumbling and conditions in both the US and China appear to be improving. The price of oil, which was another trouble spot in 2015, is expected to stabilise at $55 a barrel in 2020 and is now less likely to trigger a major shock, Mokrane said. On the negative side, forex volatility has increased the cost of portfolio diversification, as for example the Swedish currency has appreciated over 5% against the dollar in the last month alone.
Based on historical performance, it is evident that real estate investments have delivered good returns. ‘It is an asset class that has really done the job, it has had an excellent outperformance compared to equities, corporate or government bonds, and we should celebrate that,’ Mokrane said.
Looking ahead, the apparent consensus that interest rates will stay ‘lower for longer’ is blowing a new wind into the sails of real estate. Rate rises have been pushed further into the future for all regions – 3 or 4 years for the UK, 5 years for the Eurozone. In Europe a third of Government bonds have negative yields, globally it is a quarter, to the tune of $6 trl.
‘Low interest rates can be a double-edged sword,’ said Mokrane. ‘In such an environment, income-producing assets like real estate increase in value, but prices are gradually pushed out of fair value territory. It forces a complete allocation rethink.’ He gave the example of the Dutch accountants’ pension fund, which was caught out by low interest rates and has just had to increase members’ contributions by 10%.
‘The brutal normalisation of interest rates is the most significant medium-term risk,’ he said. Another is slowing growth and rising corporate debt in China. Looking at long-term risks, they include technological advances and disruptions that lead to accelerated obsolescence. The push for socially responsible investments and environmentally friendly buildings also presents a challenge to carbon-heavy real estate. In a fast-changing world, portfolio repositioning becomes an imperative.
