MIPIM: Dearth of debt finance and interest rates threaten recovery, says CBRE

European investors have identified the shortage of debt finance and the impact of rising interest rates and inflation as the greatest constraints to the European property market recovery in 2011, according to new research by CB Richard Ellis. This marks a significant change in investor sentiment compared to last year, when demand-side risks in the occupational markets were considered the greatest threat and one in three investors saw a 'double-dip' recession as their primary recovery concern.

The findings are part of a survey of almost 350 European real estate investors conducted by CBRE and launched at the company's European Investment Briefing held at MIPIM, the international real estate event held annually in Cannes, France.

A shortage of debt finance and the impact of rising interest rates and inflation were each identified by around 20% of survey respondents as the greatest threats to the ongoing property market recovery this year. These concerns reflect the impact of continued credit constraints coupled with above-target inflation, rising bond yields and expectations that rate increases from the current ultra-low level are coming closer. Over the past few months there has been a sharp increase in medium-term interest rates - for example, the German 10-year government bond yield has increased from a low of 2.15% in August last year to around 3.15% now. This is increasing the cost of capital to banks and thus the rates at which those lenders who are still active are prepared to lend.

Investors' current concerns contrast strongly with those from last year’s survey. At this time in 2010, investors were most concerned about the demand-side drivers of the property market. The possibility of a double-dip recession and weakness in occupier demand featured as the greatest threats to recovery for more than half of respondents. These concerns have not gone away, but they have clearly receded. In the 2011 survey, only 29% of investors cited these as the greatest threat.

'Real estate is often considered as a hedge against inflation, but this is true only to an extent and depends on the source and nature of inflationary pressure,' said Peter Damesick, EMEA Chief Economist at CBRE. 'Indexation (which is the norm in most of Europe) provides short-term protection against inflation, but this is only sustained if underlying rents also increase in line with inflation in the longer term, which requires some strength in occupier demand.' The cost-push inflation that is affecting Europe at the moment, driven by currency weakness and increases in oil and raw material prices, is much less likely to lead to increases in rental value, he added. 'History also tells us that if higher inflation induces tighter monetary policy, that can prove negative for property performance.'