Editor's choice: Mario is back – and so are the Australians

Mario Draghi’s long-awaited announcement on Thursday that the European Central Bank has finally unleashed its offensive against economic stagnation in the eurozone with a quantitative easing programme gratified global capital markets as well as European real estate commentators.

The bigger-than-expected QE programme will involve buying €60 bn of assets a month, including government bonds, until September 2016. ‘The European Central Bank president is to be congratulated for turning the most reluctant "quantitative easer" among the world's main central banks into one of the most committed and aggressive ones - not least by European standards,’ according to Nick Spiro, the London-based managing director of Lauressa Investments and owner of Spiro Sovereign Strategy. ‘Mr Draghi, whose own credibility was on the line today, donned his "Super Mario" outfit and once again dazzled investors. It's clear that "Draghi is back",' he told PropertyEU.

The QE programme is good news for real estate markets, noted Sabina Kalyan, global chief economist at CBRE Global Investors. The programme puts a floor under the eurozone economic recovery, reassuring investors that they should continue to see a slow improvement in occupier market fundamentals, she argued. 'However, as the eurozone still has much structural reform to enact, the capital market impact on property pricing is likely to be larger, and certainly in advance of, than the positive boost to occupier market demand.'

CAPITAL APPRECIATION DRIVEN BY YIELD MOVEMENTS
What this really means is that real estate investors will be facing capital appreciation driven by yield movements rather than rental value growth in the near term, she said, a view shared by David Hutchings, Cushman & Wakefield's head of EMEA investment strategy. Indeed, he believes the impact of the QE programme on property markets in general could be substantial as even more demand will now be diverted into the market. 'As a result, yields are set to fall more than expected and volumes will be pushed further back towards record levels,' he said in a special note.

Hutchings predicts that without QE, the market would be expecting a 5-10% increase in European investment volumes this year alongside a 20-30 basis points prime yield fall. With a successful QE package delivering lower for longer borrowing costs, more growth and some reform, that forecast is increased to a 40-70bp yield fall and a 20%-plus jump in property trading.

That is great news for brokers and other advisers, but not so good for investors who are already finding it difficult to access fairly priced real estate product in Europe. No less than half of the fund managers polled in INREV’s Global Investment Intentions survey, which was released this week, cited availability of suitable product as one of the most challenging obstacles facing investors when investing in non-listed real estate funds. The figure was almost 60% for fund of fund managers.

The cause of their concern is common knowledge. Equity-rich sovereign wealth funds (SWF) and pension funds from Asia and North America continue to target European real estate markets and will play an even bigger role in 2015. And Europe is not only awash with capital: the ready availability of equity also extends to debt. Non-bank lenders, such as debt funds and insurance companies, are expected to raise their game significantly this year, providing further diversification from the bank-dominated landscape of the last boom.

PARALLELS WITH THE BOOM YEARS
While it is encouraging to see European markets becoming more liquid after the long freeze in the wake of the global financial crisis, there are also concerns that pumping more cheap money into the eurozone - as the ECB is now doing - will fuel asset bubbles and relieve pressure on countries like Greece, France and Italy to carry out much-needed market reforms.

Looser lending to the real estate industry is also fuelling fears that the debt market may have rebounded too far, too fast. German banks in particular are lending at rates similar to pre-crisis levels. As one pension fund manager said in Emerging Trends in Real Estate Europe 2015, a report published jointly by the Urban Land Institute (ULI) and PwC, some banks are back into relatively easy lending again, based on volume targets. ‘I don’t detect more discipline in terms of their behaviour compared to 2006.’

Other parallels with the boom years are being signalled. For some, the disconnect between values and rents is all too reminiscent of the pre-crash period. ‘We know how the story ends, we just don’t know when,’ another respondent to the Emerging Trends report said. ‘We’re selling because people are forecasting good rental rates and low cap rates. That sounds like the top to us,’ said another.

Among those that have recently embarked on a selling spree is Orion Capital Partners. At end-December the UK private equity firm sold the Puerto Venecia retail complex in Zaragoza to UK listed REIT Intu for €451 mln. The London-based fund manager is believed to have cashed in over €200 mln on the sale of the complex which it bought at a bargain in two separate acquisitions in 2013 and in 2011. And just this week, Deutsche Asset & Wealth Management (DeAWM) capitalised on the current ‘strong interest in London’ by selling the Tower Place office building to China’s Ping An for £327 mln (€427 mln), representing a 15% premium to the asset's latest appraised value of €370 mln at end-September 2014.

Europe moves at various speeds and it is certainly too early to call the top for all markets and real estate segments. But there is a definite momentum to go up the risk curve and growing concerns that there may be insufficient regard to risk in the process. Moreover, even those who were badly burned during the last crisis are now returning to the market.

'The Australians are coming,' one delegate at INREV’s Amsterdam seminar last week noted pointedly. That is a clear signal, he added: ‘We are certainly in 2007.’

Judi Seebus
Editor in chief