The European real estate sector will continue to attract investors seeking higher yields given that interest rates are set to remain low for the coming 24 months, according to Eric Chaney, chief economist at Paris-based insurance group AXA.
The European real estate sector will continue to attract investors seeking higher yields given that interest rates are set to remain low for the coming 24 months, according to Eric Chaney, chief economist at Paris-based insurance group AXA.
Speaking during a keynote presentation at the annual conference of ULI Europe in Paris on Wednesday, Chaney said: ‘My expectation is that the European Central Bank will continue with quantitative easing beyond September 2016, at least until 2017.’
Click here to watch a video of the keynote presentation
As a result, bond yields will continue to fall, he added. Indeed, Chaney sees German 10-year bond yields set to fall to zero in the not too distant future. At 0.4%, they are not far from that point now, he argued. ‘They are likely to remain low for several long years and that will push investors towards higher yielding assets.’
OIL PRICE SET TO REMAIN LOW
Within Europe, conditions will differ per country over the next few months and years, but overall growth prospects are good, Chaney said. The oil price is currently low and that is here to stay as well, he predicted. Pointing to Saudi Arabia, Chaney said he expected the world’s largest oil producer to defend its global market share rather than the price of oil over the next two to three years. ‘That will have deep consequences on the global economy.’
Oil producers such as Russia, Iran, Nigeria, Venezuela, Brazil and Mexico may suffer, but overall a low oil price is good for the economy, Chaney argued. ‘The US remains one of the largest net oil importers in the world,’ he pointed out. ‘But the biggest beneficiary is emerging Asia. Most countries there are net importers.’
While Europe is about to enter into an extended period of QE, in the US the Federal Reserve Bank is expected to stop adding to the monetary supply in the coming year and raise interest rates. But Chaney questioned whether this was sustainable. To what extent is the US prepared to import the risk of deflation?, he asked. ‘The Fed might have to reconsider the prospects for its monetary policy. It is expected to raise its rates this year, but I have my suspicions about whether that will happen,’ he said.
Chaney conceded that diverging monetary policies were creating a lot of uncertainty and leading to currency wars in certain countries. ‘But,’ he said, ‘if I had to say whether we are better off in a world with excess liquidity or a liquidity crunch, I would prefer the first.’
POLITICAL RISKS REMAIN IN THE EUROZONE
Although relatively optimistic about macro-economic conditions for the next 24 months, Chaney warned that some risks still remain in Europe. Recent developments in Greece following the election of the radical left-wing Syriza party are ‘worrying’, he said. If negotiations between Greece, the ECB and its partners fail, a Grexit would be on the cards, he noted. ‘If Greece is cut off from liquidity, it will have no other choice but to print money. If that happens I think there will be contagion and panic in the market.’
On the other hand, if Greece does get some debt relief, other countries in Europe will immediately ask for it too, he said, pointing in particular to Ireland and Spain. Germany is willing to underwrite the financial weakness of some countries, but only if they raise their competitiveness and France and Italy have been dragging their heels in that area, he added. ‘That would have political consequences. The long-term sustainability of the eurozone is not guaranteed. The situation looks relatively positive in the long term, but the eurocrisis is not over. We haven’t seen the end of the story yet.’
Nevertheless, there is reason for optimism, he said, pointing to an impressive pipeline of basic research in the fields of material physics and biology. ‘I am optimistic about the long-term cycle of growth. Engines of growth like China may be slowing, but China is reforming its economy to make it more sustainable. Maybe it is possible to take a positive view for the next 10 years.’
Click here to watch a video of the keynote presentation
The February edition of PropertyEU Magazine features a special section with highlights from the ULI/PwC Emerging Trends reports for Europe, US & Canada, and the Asia-Pacific region.