Worsening bank crisis may hit property deals

The renewed market focus on the financial problems of Italy and Spain, and subsequently European banks could ultimately have a negative impact on property transactions, Rob Wilkinson, Chief Investment Officer at AEW Europe, told PropertyEU. 'The difficulties in the interbank market could once again create flow-on effects for borrowers with the availability and cost of credit negatively impacting on property transactions,' he said.

Wilkinson believes that due to the heightened possibility for the impairment of principal, sovereign bond yields are likely to remain elevated above historical levels. 'Sustained weak growth in the crisis countries is affecting rental growth prospects and higher bond yields may similarly affect property yields. However, despite this poor overall outlook for these countries, we believe that there are still good risk-adjusted returns on offer for the intelligent stock picker.'

Considering the EU authorities' determination to keep the EU intact, it is now looking more likely that once assistance measures such as the European Financial Stability Facility (EFSF) run their course, the EU will have to become a full-blown transfer union with all the fiscal responsibility that implies, Wilkinson continued.

'We know that Germany is fiercely opposed to this under the current euro governance structure, and would only accept if Euro member states strongly commit to limit their public deficits on a permanent basis, for example in written form in their constitutions. But even if this becomes effective, it will most likely be at the expense of the Finnish, Dutch, German and Austrian tax payers. If voters in these countries prevent the formation of a fiscal union, the outlook for the beneficiary crisis countries will worsen.'

Wilkinson said there were some clear risks for real estate and other asset classes under this scenario. 'But,' he added, ‘we believe that excess risk aversion could drive property prices in some locations and property types below intrinsic value, presenting sound investment opportunities amongst the volatility.’

AEW Europe is one of the leading investment managers in Europe with assets under management of EUR 17 bn. The firm ranks 19th in PropertyEU's ranking of leading real estate investment managers in Europe - listed and non-listed. The full list is included in the September issue of PropertyEU. Click on the following link to subscribe.