The US Federal Reserve's decision to begin scaling back quantitative easing, also referred to as 'tapering', has helped bring Europe and its real estate markets back into focus, EPRA's Amsterdam Insight meeting heard this week.
The US Federal Reserve's decision to begin scaling back quantitative easing, also referred to as 'tapering', has helped bring Europe and its real estate markets back into focus, EPRA's Amsterdam Insight meeting heard this week.
In May last year, the then-Fed president Ben Bernanke announced that he intended to scale back the bond-buying programme as the US economy appeared to be in recovery mode. According to Jan-Willem Vis, chief investment officer global listed real estate at BNP Paribas Investment Partners, economic data for Europe has improved better than expected since then.
‘This was one of the first signs that Europe is stabilising, and as European valuations today are cheaper than elsewhere in the world we have seen more demand for European securities. We expect this trend to continue, although if there is no clear sign that growth is continuing people will start to sell.’
All Change
The Fed has generated a huge amount of liquidity by spending $85 bn (€62.4 bn) on a monthly basis in an asset purchase programme to stimulate the US economy in the wake of the financial crisis. This liquidity has had a ‘huge impact’ on listed property stocks and listed property companies, Vis said: as cap rates compressed, demand soared for income securities. ‘We have been very outspoken and said that property may not be the best asset class to invest in for the short term. At the time we faced a lot of resistance because the demand and money were there and people wanted to invest in real estate.’
Since Bernanke’s statement in May, which was reconfirmed at his last press conference as Fed president in November, the stock market has witnessed a dramatic fall in demand for income-type real estate securities, Vis said. Income securities is a term used to describe shares which offer higher dividend yields but lower annual growth potential than stocks driven by market growth. As a result, they offer a lower level of volatility compared with the overall stock market.
The fall in demand for income securities was particularly visible for those most closely correlated with the bond markets, Vis said. ‘If you look at 10-year swaps for the next six months they will be volatile and we believe that the US Treasury yield will hover around 3%, or may even exceed this figure. That means there will be another shock for income-type products like listed real estate so we are focusing on growth stocks that benefit from increasing economic activity when things are going better.’
Fellow panellist Rafael Torres-Villalba, head of listed real Estate for Europe at APG, said ongoing economic recovery was likely in the US. ‘We are therefore more bullish on the US economy and slightly less so on Europe. That said, Europe is starting to turn the corner, although it is really fragile and this is also reflected in our portfolio: the Continent is cheaper with more risk versus our US portfolio.’
Joost Uwents, CEO of WDP, observed that more money was coming into the European logistics property sector, a potential source of pressure on yields. 'With tapering the cost of debt can increase and we will have to see how we play the game as we need money to invest for growth.'