Yields for core properties in prime locations may be trending towards levels below the previous boom period in 2006-07, but there are no signs of a bubble, delegates heard on Tuesday at the annual Inrev conference in Berlin.
'Is Europe in recession? On the contrary, we're seeing the beginning of economic expansion,' José Luis Pellicer, partner and head of research at Rockspring PIM, said during a panel session, ‘What’s going on?', which examined the big issues and trends in the main regions of the world.
Real estate credit is not growing and supply in terms of net additions in percentage terms is not increasing either, he continued. That is not the case in every market, he added, pointing to London City offices, Warsaw, Dublin and Prague.
'There are danger spots, but in general we're seeing declining acquisitions of development sites. There could be a correction, as there was in the UK last year, but it would not be underpinned by the property and financing market fundamentals. Real estate is still relatively fairly priced compared to other asset classes…It doesn’t look like we are in an asset bubble.'
It's the bond yield that's wrong
Commenting on the prevailing sentiment among Inrev delegates that property yields appear unsustainably low, Megan Walters, international director and head of research for Asia-Pacific at JLL had a different take. 'The fundamentals are pretty strong and most locations (in Asia-Pacific ed.) are not overbuilt. Things look pretty favourable...It’s not that the property yield is wrong, it’s the bond yield that is.’
Indeed, both government and corporate bond yields have fallen to record lows in the wake of the global financial crisis due to quantitative easing in both the US and Europe and subsequently low interest rates in both regions.
At some point, however, the European Central Bank will discontinue its expansionary monetary policies and move towards normalisation, Jürgen Stark, former board member of the European Central bank (2006-11) and vice president of the GermanBundesbank (1998-2006), predicted during a keynote presentation.
The Federal Reserve in the US may be moving towards normalisation, but the ECB is nowhere near to being on its way, he added. 'The new normal has arrived when the normalisation of central banks and interest rates are back to where they should be. The question is how to get there.'
Stark added that he didn't expect the ECB to change its monetary stance soon. 'They are being extremely cautious because the circumstances are so complex. We have no historic experience of this…What we need is a rule book for normalisation, but there isn't one.’
Black swans
Commenting on potential black swan events, Walters from JLL said it would be foolish to disregard North Korea. Meanwhile fellow-panellist Will McIntosh, global head of research at USAA Real Estate Company, pointed to the newly installed US president Donald Trump and the possibility of new government regulations. 'Tax increases would drive foreign investors away and push capital values down.'
Rockspring's Pellicer pointed to the repercussions of Marie le Pen sweeping into power in the French presidential elections as a potential black swan event. 'That's a total unknown...The implications could be massive or there could be nothing.'
