Brexit has not yet caused a meaningful slowdown in the UK economy and any real impact won’t be felt until 2019. That said, the greatest potential for a European upset this year is likely to be political, says Jeremy Plummer, head of EMEA at CBRE Global Investors.
Which trends and developments do you hope for most for your business?
2017 was a great year for the European economy and real estate performance, so we would hope to see that continue. In particular, we are encouraged by the trend to supply-side reform and a more business-friendly environment in France, as well as the continued strong investment flows into Spain and Germany despite ambiguous election results.
What do you fear the most in the coming year?
Competition for high-quality assets is intense and this may restrict our ability to deploy capital into opportunities which meet our clients’ investment objectives.
Will you be expanding or scaling down your business in 2018?
We will continue to grow our priority programmes by making selective acquisitions for both our core and value-add strategies. We will also be actively selling to harvest profits where we have completed business plans, in some cases ahead of the original planned timing.
What is set to have the biggest impact?
Fortunately rising interest rates should not prove to be an issue for Continental Europe in the near term, where bond yields are set to remain historically low and financing accretive. The UK is likely to see a couple of base rate hikes in 2018 but once again, given limited debt in the system this should prove digestible. Brexit has not yet caused a meaningful slowdown in the UK economy and its real ramifications won’t be felt until 2019. Technology continues to have a profound and constant structural impact on retail and logistics in particular but that isn’t a cyclical or proximate ‘trigger’ threat. Therefore the greatest potential for a European upset this year is likely to be political – whether a shock/disruptive result in Italy; a further deterioration in the Catalan situation; or something external from the Middle East causing an oil price shock; or even Asia, with a hard landing in China.
What will trigger the next downturn in real estate?
Many of the culprits of previous cycles are absent this time round – debt levels are lower; forecast interest rate rises are modest; development has been restrained outside of a few sub-markets; and there’s not an obvious source of hot foreign capital that could go into reverse. So I suspect this may be just a common or garden business cycle downturn. As we continue to absorb the spare capacity in Europe and the economic recovery becomes late cycle, and interest rates start to rise, rental growth will moderate, and the current low yields will be harder to justify on the basis of future NOI growth. We should therefore see an ‘organic’ late cycle moderation in returns.
