The huge wall of international capital that continues to head for Europe has put a permanent smile on the faces of many property brokers across the Continent.
The huge wall of international capital that continues to head for Europe has put a permanent smile on the faces of many property brokers across the Continent.
Indeed, in the real estate investment markets in the leading capitals of Europe it almost feels like 2006-07 all over again - even if equity rather than leverage is now the key driver. Canny investors know how to read a permanent smile on a broker’s face: more often than not it means dozens of bidders for core assets and on the back of that rising prices and falling yields, fanning the frustration of even the biggest European investors with the deepest pockets.
Against a backdrop of weak economic recovery at best and little or no organic rental growth, the low yields some international investors are prepared to accept have raised the eyebrows of local investors even in countries slightly off the beaten track.
There is another risk, writes Joe Valente, European head of strategy for real estate at JP Morgan Asset Management, in a recent commentary. ´Six years after the Global Financial Crisis (GFC), the Eurozone continues to slip and slide sideways. Growth remains illusive whilst the alarming possibility of deflation lies just below the horizon. The resounding failure of the EU to forge any kind of coherent economic policy or, begin to implement badly needed structural reforms has helped to fuel a new wave of Euroscepticism. The risk of financial meltdown may appear to have eased, but its place has been taken by popular unease and a miscellany of political parties implacably opposed to EU membership. The net result is growing uncertainty and increased volatility ensuring that the region remains vulnerable to future shocks.’
GREEK CRISIS
As if on cue, this week Greece’s political troubles re-erupted following prime minister Antonis Samaras’ announcement of a snap presidential election. According to political commentators, an early general election could follow if he fails to win sufficient support for his candidate. Investors are already panicking that the radical left Syriza party may come to power: on Tuesday, Samaras’ statement triggered the sharpest drop on the Athens stock exchange since the 1980s and sent reverberations through world markets.
An electoral win by Syriza would reignite fears about Greece’s place within Europe’s monetary union as the party is seeking to renegotiate the country’s sovereign debt and boost public spending. These moves would put Athens at loggerheads with its creditors, commentators warn. ‘Greece in the next six weeks may prove to be more important for global markets than Russia/Ukraine was in 2014,’ Charles Robertson, chief economist at Renaissance Capital, told the Financial Times. ‘A possible Syriza election victory may force the eurozone to choose between a fiscal union (debt write off for Greece) or the first euro exit.’
Valente sees more reason for concern. In his piece, menacingly titled ‘The rise and rise of the Eurosceptic Union’, he warns that economic malaise and the rise of Eurosceptic fervour will fuel more uncertainty and volatility across the region. Valente was not thinking primarily of Greece when he wrote this, but rather the proposed EU referendum in the UK. ’This could herald several years of political uncertainty and impact on investor intentions including those in the real estate market,’ he claims.
He gives the following reasons: -
1) Growing uncertainty will not encourage corporates to expand whilst the lack of employment growth will continue to dampen the recovery of the leasing market;
2) The rise in volatility will impact on capital flows into the region during 2015. Such an effect will impact on pricing of real estate given that ‘weight of capital’ has been the main driver of pricing in the region;
3) Whilst the increase in volatility may reduce the absolute level of capital flowing into the region over the next few years, it is also likely to expect real estate investment to gravitate once more towards ‘safe havens’ helping to counteract the expected pricing correction in a small number of major European markets;
4) Against such a background peripheral European markets appear most vulnerable as capital becomes concentrated once more on the larger and more transparent markets. This would be a eversal of the recent trend which saw peripheral markets taking an increasing proportion of investment activity.
DRAG ON RECOVERY
Valente points to a number of reasons that may fuel Euroscepticism further in the coming years such as the lack of employment growth and the danger that economies will dip, once again, into a recessionary environment. This is, he says, in large part, due to the failure to grapple with the major elements underpinning growth such as structural reform. ‘Both markets and European institutions are in dire need of reform. Failure to tackle these barriers will not just continue to act as a drag on the recovery but impede the general level of competitiveness required to generate real rates of economic growth.’
Other causes for concern are the gap between social need and financial resource, which is as wide as it has ever been; the debt mountain which continues to be a major drag on the region’s recovery; and the lack of coherence amongst European governments. ‘Economic policy in France continues to stress the need for measures to protect industry, a sharp contrast to the UK where the emphasis is on openness and competition,’ he claims. ‘In Italy, there is something of a clamour for further relaxation of fiscal rules, whilst in Germany, the priority is still viewed in terms of export competitiveness due to wages rising faster than productivity.’
All this makes for some very fertile ground for the rise of an anti-EU agenda and a level of popular disillusionment, Valente concludes. Eurosceptic parties have already grabbed a bigger piece of the political pie across key countries in Europe. In France, François Hollande’s party was trounced into third place by the anti-EU parties of the right in the 2014 European Parliament elections. Italy, Spain, the UK and the Netherlands saw similar trends.
‘Whilst there is little common ground between these parties beyond the fact that they are mostly Eurosceptic, they do, nevertheless, now control one-third of European Parliament and are likely to gain further ground given the lack of economic progress and reform required across the region,’ Valente said.
The Greek crisis makes abundantly clear that the clouds over the Eurozone have never really disappeared. The question is whether they will disappear in the New Year or darken further and usher in a new storm.
Judi Seebus
Editor in chief