Market outlook turns positive despite geopolitical threats

As the macroeconomic environment starts to rebound, all signals are turning to green again for the European real estate financing market, according to Reinhard Kutscher, board member of German fund and asset manager Union Investment.

The market is becoming competitive again, he noted in an exclusive interview with PropertyEU. ‘Banks have come back and becoming more aggressive. They’re like equity investors, they’re keen to do financing of quality core assets. But like equity investors, they’re starting to climb up the risk scale. That’s what investors are doing, because of lack of opportunities, and the banks are following.’

As a result, margins are starting to shrink again, but not far beyond 60-65% loan-to-value (LTV) ratios, Kutscher added. ´LTV levels are still far away from where they were before the crisis, which was actually one of the reasons for the crisis in the first place. We don’t see any signs yet that the market is going crazy, but it may well go in that direction. The market is definitely looking ahead.’

A key signal to watch for in the current cycle is rising interest rates which are currently at an historic low. But, according to Union Investment’s forecast, a significant increase is not expected to materialise until after 2015. Kutscher: ‘There will be some change in the next two to three years, with interest rates returning to normal. In the US, rates are starting to go up and the European Central Bank will have to follow in the next 12 to 18 months. 2015 may not be the end of the low-interest rate story either, but at some point in the cycle there will be a correction. The main question is the timing and whether we will see it in this phase of the market cycle. But it is just a matter of time.’

GEOPOLITICAL THREATS
Aside from rising interest rates, one of the biggest unknowns facing Europe at present is the UK threat to withdraw from the European Union, Kutscher said. At the same time, a critical voice is necessary in Brussels, Kutscher warned, pointing to the rise of anti-European parties in the recent European Parlamentary elections and the repercussions of a growing economic divide between the wealthy northern European countries and the peripheral member states that have embarked on major belt-tightening campaign. ‘Hopefully the UK will stay inside the EU. Its membership is a good, correcting factor.’

Geopolitical risks emanating from the Crimean conflict between Ukraine and Russia continue to rumble on while the faltering Chinese economy could have a domino effect on other economic powers around the globe, Martin Brühl, head of international investment at Union Investment, noted: ‘The German economy appears not be affected directly for the time being, but we closely monitor these events.’

Another challenge lying ahead for the European Union is energy security. In Germany, nuclear plants are to be dismantled following a social outcry in the wake of the crisis at the Fukushima nuclear plant in Japan in 2011. Since then, Japan has taken steps to reduce its dependence on nuclear energy and has increased consumption of liquefied natural gas (LNG), Kutscher pointed out. ´Japan has shown it is possible. LNG needs to be promoted in continental Europe as well.´