MSCI signals emergence of pricing bubbles in Europe

With global real estate markets at or close to historic pricing levels, the top of the cycle appears to be within reach, IPD index data from MSCI suggests.

Globally, property generated average returns of 9.9% in 2014, the best performance since 2007 and the fifth consecutive year of increasing returns, MSCI claims in its annual report on 2014.

Performance improved in virtually all markets in Europe as global investors continued to pour capital into the region, particularly the countries on the periphery of continental Europe.

'A series of countries performed particularly well over the past year, most notably Ireland with a record return of 40%, but also the UK (17.9%) and US (11.5%),' said Peter Hobbs, head of global research at MSCI. He added that the strong performance of global direct property was paralleled in the public, REIT, markets, with a return of 19.5% for 2014. 'As such listed real estate significantly outperformed broader equities (at 10.4%) and government bonds (10.9%).'

The European Central Bank's quantitative easing programme is likely to boost real estate prices further in Europe in 2015, Hobbs said. With debt finance historically cheap, the wall of capital and the QE programme are fuelling fears that price bubbles may emerge in a number of asset classes.

Aggressive pricing is particularly evident in the US where income returns are now lower than at the prior peak, and pricing is primarily supported by the exceptionally low bond yields, Hobbs added. 'More broadly, the chart of income yields compared with their historic averages shows how most global markets are now at or close to historic low levels,' Hobbs said.