European real estate professionals have welcomed the quantitative easing programme announced today by the European Central Bank.
European real estate professionals have welcomed the quantitative easing programme announced today by the European Central Bank.
The ECB launched its long-awaited offensive against economic stagnation in the eurozone, announcing a bigger than expected QE programme that will involve buying €60 bn of assets including government bonds a month.
'We are very pleased that the ECB has finally announced a QE programme and even more so that it has exceeded market expectations of a €600 bn programme,' said Sabina Kalyan, CBRE Global Investors Global Chief Economist. 'By committing to expand its balance sheet by over a trillion euros, with room for even more if inflation has not picked up in 2016, the ECB has firmly signalled its commitment to eurozone growth and unity,' she said.
'The fact that most of the additional purchases will be subject to risk sharing across member states, regardless of economic strength, is also a clear signal of the ECB’s commitment to the southern European recovery, although we note that Greece is excluded from the programme as its bonds are not investment grade.'
Kalyan believes the ECB's QE programme adds further momentum to the 'strong and broad' recovery in European real estate capital markets that has been developing over the past 18 months. 'By keeping bond yields low, the QE programme will affirm the attraction of property as a higher yielding asset class offering an attractive income premia over bonds. We should therefore see a continuation of the aggressive investor interest in good quality assets with long leases to good quality tenants, and for prime yields to move even lower.'
The QE programme also puts a floor under the Eurozone economic recovery, reassuring investors that they should continue to see a slow improvement in occupier market fundamentals, Kalyan added. 'However, as the eurozone still has much structural reform to enact, the capital market impact on property pricing is likely to be larger, and certainly in advance of, than the positive boost to occupier market demand. What this really means is that investors will be facing capital appreciation driven by yield movements rather than rental value growth in the near term, with the rental recovery coming through later as improved corporate confidence feeds into job creation and improved occupier demand. After all, QE is not a panacea – it merely allows the room for the Eurozone member states to continue the hard work of rebuilding their balance sheets.'
BETTER ECONOMIC PERFORMANCE LIES AHEAD
According to David Hutchings, Cushman & Wakefield's head of EMEA investment strategy, the scale of the ECB's QE programme has taken markets somewhat by surprise. 'But this should help to consolidate recent bond yield and currency falls and hopefully pave the way for higher inflation expectations and also better GDP growth. Maintaining market confidence will be crucial to making this happen in the short term of course but to deliver real and sustainable changes going forward, the QE programme needs to encourage governments to get on with deeper structural reforms. In our opinion it will be the committed reformers like Spain who will be most rewarded with increased activity and inward investment.'
Hutchings believes the impact of the QE programme on property markets in general could be substantial if it is successful as even more demand will now be diverted into the market. 'As a result, yields are set to fall more than expected and volumes will be pushed further back towards record levels.'
Cushman & Wakefield predicts that without QE, the market would be expecting a 5-10% increase in European investment volumes this year alongside a 20-30 basis points prime yield fall. With a successful QE package delivering lower for longer borrowing costs, more growth and some reform, that forecast is increased to a 40-70bp yield fall and a 20% plus jump in property trading.
QE ANNOUNCEMENT REMOVES UNCERTAINTY FROM MARKET
Neil Blake, Head of EMEA Research at CBRE, believes the ECB's €1.1 trn programme to prolong low eurozone interest rates will boost the competitiveness of the euro. 'The eurozone’s commercial real estate market should benefit in the short to medium term from the removal of uncertainty around potential interest rate raises and currency fluctuations...QE might not be a panacea for low growth in the eurozone but it will not do any harm either and taken together with the fall in oil prices, the eurozone economic and property market outlooks now look brighter than they did only a few weeks ago.'
Blake argues that the only potential downside for continental European real estate is if foreign investors start to expect a long-term depreciation of the euro over two or more years. 'If this happens we should expect to see a discount placed on European real estate by these buyers to compensate for anticipated exchange rate movements. This will offset some of the gains listed above'.
DRAGHI IS BACK
ECB's launch of a full-blown QE programme is a 'seminal development' in the history of Europe's single currency area, according to Nick Spiro, the London-based managing director of Lauressa Investments and owner of Spiro Sovereign Strategy. 'Mario Draghi, the ECB's president, is to be congratulated for turning the most reluctant "quantitative easer" among the world's main central banks into one of the most committed and aggressive ones - not least by European standards. Mr Draghi, whose own credibility was on the line today, donned his "Super Mario" outfit and once again dazzled investors. It's clear that "Draghi is back",' he told PropertyEU.
However, Spiro also has some reservations and argues that what Draghi may have extracted from the ECB's governing council in terms of the headline-grabbing size of the bond purchases is severely mitigated by what he has had to compromise on in terms of the 'risk-sharing', or mutualisation, component of the programme. 'This is not the unconditional and straight-forward government bond-buying undertaken by the US Federal Reserve and the Bank of Japan (BoJ). This is a politically charged and complicated European scheme which Mr Draghi is doing his best to portray as a credible and effective programme.'
Spiro fears that Draghi does not have the same level of support from the German government that he enjoyed in 2012. 'Mr Draghi may have impressed markets today, but he has riled Germany's political establishment...While the size of the ECB's bond-buying scheme exceeds market expectations, the programme throws the severe governance problems of the eurozone into even sharper relief. To some extent, this is the worst of both worlds for the eurozone: limited risk-sharing which makes a mockery of the supposed singleness of the Eurosystem and mounting German opposition to the conduct of European monetary policy.'