European real estate experts have welcomed the European Central Bank (ECB)’s cut in interest rates, saying it opens the way for greater market liquidity and future yield compression.
The ECB cut interest rates for the first time in nearly five years on Thursday in a widely anticipated move, bringing the deposit rate down to 3.75%.
The Frankfurt-based central bank trimmed its key lending rate, the one that affects mortgage rates, by 25 basis points to 4.25%, down from the record high of 4.5%.
‘It’s a step in the right direction,’ said David Rea, global director of macro research & chief economist EMEA at JLL. ‘It opens the door for both further cuts in the future and to a future compression in real estate yields, an attractive prospect for investors. Lower future borrowing costs and the possibility of capital value appreciation will likely begin to improve both underwriting ability and willingness, while increasing transactional liquidity.’
Dominique Moerenhout, CEO of listed industry body EPRA, noted: 'Today’s cut is welcome relief – it shows the ECB’s confidence both in the Eurozone’s ability to manage the risks of rising prices and in inflation staying consistently lower. For listed real estate, the move creates a climate for growth. In bringing down the cost of borrowing it will shore up confidence to commit and invest capital in new and existing assets – a confidence that has been battered by uncertainty in recent years.'
Karolis Adlis, executive director at leaseback specialist WP Carey, said the rate move indicated that 'the worst of inflation is behind us' and markets should only get more stable, boosting transaction activity.
'While we still have a long way to go, this cut should help drive further confidence for investors, particularly in real assets, and will encourage sellers to sell and buyers to buy,' he said.
'For the sale-leaseback market, we expect this cut to have a net positive effect as it will provide investors with cheaper capital. This, in turn, should drive increased deal volume,' he added.
Thursday’s ECB rate cut was not the first across the world of central banking. The Swiss National Bank moved in March and CEE banks were already acting in the final quarter of last year. Earlier this week the Bank of Canada also cut rates by 25 basis points (down to 4.75% after holding at 5% since July of last year).
A first step, not a new dawn
Although a step in the right direction, the ECB’s rate cut is not a paradigm shift, particularly for the real estate sector, according to JLL’s Rea.
'Policy rates remain well into contractionary territory and have further to fall before having any stimulative effect on economic activity more generally, let alone on real estate. But it’s a step in the right direction. It opens the door for both further cuts in the future and to a future compression in real estate yields, an attractive prospect for investors,' he said.
Lower future borrowing costs and the possibility of capital value appreciation will likely begin to improve both underwriting ability and willingness, while increasing transactional liquidity, he added. 'But this will happen slowly, and at different speeds. Market adjustment was not uniform as yields rose, and it will not be as they compress. We anticipate that more liquid gateway markets will adjust more quickly.'
Moody’s commercial real estate economist Ermengarde Jabir warned that the move will have limited effect for those looking to refinance assets, particularly if not soon followed by a similar cut by the Fed. The current issue facing commercial real estate centres on refinancing risk for maturing loans, many of which are on properties whose values at present are lower than the loan amounts on those same properties in need of refinancing.
'While rate cuts are considered to be much needed relief for CRE lending, these current rate cuts are rather nominal and are not expected to have any significant effect on the pressures faced by lenders and borrowers alike,' she wrote in a note sent to clients. 'The policy reductions would likely have to be sharper for any real relief to be felt as the market has likely already priced in previous expectations of a small rate cut this year.'
Additionally, while this may alleviate some of the strain on loans made by eurozone banks, lifecos, and other lenders on properties within the ECB’s geographical coverage by bolstering property values, cross-border risk remains, she noted. 'Many European banks, in Germany in particular, have sizeable loan portfolios of US properties, particularly in the office sector, so while these rate cuts are a movement in the right direction, the reality is that due to sizeable lending and investment portfolios across countries, for those suffering from US CRE woes, until the Fed lowers rates, there will be little reprieve in sight.'
Mahdi Mokrane, head of Global Investment Strategy at Patrizia, believes that although the ECB has not committed to any particular path of rate cuts after June, it will continue to lower rate at a more aggressive pace than currently expected.
'Most economists predict we are in store for gradual rate cuts on a quarterly basis, with estimates of 50-75 bps of cumulative cuts this year by most major central banks. However, even with the renewed scepticism around quicker rate cuts in Europe, at Patrizia we believe that cuts will happen faster than many might expect,' Mokrane explained.
'The main reason for this is that net credit growth in the region has turned anaemic at both household and corporate levels, meaning that the economy as a whole cannot afford the current interest rate levels. What’s more, we observe that during past periods of monetary loosening, the pattern has almost always been more aggressive than anticipated i.e. central banks tend to wait too long to loosen,' he added.
