Over the last couple of weeks, the financial pages have been dominated by the ebbs and flows of global equity markets, particularly the decline recorded in the Chinese stock market, writes Joe Valente, European Head of Research for Real Estate at JP Morgan Asset Management in a commentary.
Over the last couple of weeks, the financial pages have been dominated by the ebbs and flows of global equity markets, particularly the decline recorded in the Chinese stock market, writes Joe Valente, European Head of Research for Real Estate at JP Morgan Asset Management in a commentary.
Given that there is an argument that the performance of real estate equities can act as a lead indicator for the pace of capital value growth in the direct real estate market, is the recent volatility something to worry about?
On the one hand whilst the FTSE has fallen by 15% since April, real estate equities declined by only 4% during the same period. This would suggest that all property capital value growth is due to slow rather than decline. Moreover, the subsequent recovery in European markets would tend to reinforce this position.
However, recent volatility in the public markets does reflect increased risk aversion and caution which could certainly take the froth out of some European real estate markets even though there is precious little evidence to suggest an immediate, or direct relationship, between the FTSE and investment activity. In any case it seems unlikely that the recent equity market turbulence could provide the trigger for a major re-pricing.
Rather, the biggest risk facing property is a jump in risk-free rates which, in turn, would certainly trigger a spike in property yields in some markets. Yet over the past month, 10-year bond yields fell by another 40bps and dipped below 1.7%. Indeed, to the extent that recent equity market volatility has further strengthened policymaker’s resolve to normalise policy in a gradual manner, they are more likely to extend than to curtail the property market upswing.
Before jumping to any immediate conclusions, however, remember the fickleness of the public market. The fall in value in public markets three weeks ago was, of course, balanced by the miraculous recovery over the past few weeks.
Having said that, there is no way of getting around the great unanswered question which takes us back to China. The extent to which the debt mountain has expanded so rapidly, the residential market which has lost its shine and the collapse in the local equity market – the three main concessions given by the Chinese government to the middle class all seemingly going awry. That’s probably a greater concern over the years to come. Then again there is the continuing fall in oil prices and the danger of re-igniting the prospect of deflation across the region - two issues deserving much more attention than the weekly spikes in the FTSE, Dow Jones, or Nikkei.
Joe Valente
European Head of Research for Real Estate at JP Morgan Asset Management
