GLOBAL – Commercial property prices are likely to fall in all markets if central banks unwind their quantitative easing (QE) measures early in reaction to unexpectedly strong economic growth, research from real estate firm DTZ indicates.
The study, which shows how the withdrawal of QE could affect commercial property in 20 key European and US office markets up to the end of 2017, looks at two different scenarios – an orderly unwind of QE and an early-withdrawal scenario.
If central banks move to withdraw QE early – as many market participants have feared – pricing would deteriorate in all markets, with a much sharper rise in bond yields under this scenario, as well as slower economic growth, DTZ said.
"In short, early QE withdrawal makes office markets less attractive, despite the limited probability of this scenario playing out," it said.
It added that this scenario had become more relevant after comments from the US Federal Reserve earlier this year predicted an earlier-than-anticipated withdrawal from QE measures.
Early withdrawal could provide an unexpected short-term surge in the economy next year, DTZ predicted, in which case central banks would then be likely to withdraw QE more quickly.
This would lead to a sharper rise in bond yields and slowing economic growth, with the US entering recession in 2016, according to the report.
Rental growth would then suffer, and office yields would be much higher compared with the orderly withdrawal scenario.
However, if central banks effect an orderly unwind of QE, 16 of the 20 office markets would look attractively priced, DTZ said.
Although rises in bond yields driven by QE withdrawal would drive property yields higher, this would be mitigated by lowered risk premiums and better lending market conditions overall.
The report predicted the eventual unwinding of QE would imply a sustainable recovery in the economy, giving rise to a stronger jobs market and stronger occupier demand coupled with limited new developments, resulting in robust rental growth.
Separately, a Canadian survey revealed concern about rising interest rates among leaders in the country's commercial property industry.
In its third-quarter 2013 Canadian Real Estate Sentiment Survey, the Real Property Association (REALpac) and FPL Advisory Group said the top executives were becoming less and less confident about the sector's prospects.
Survey participants – from real estate investment trusts, property companies, life companies, lenders and pension funds – were worried about the future of the Canadian economy, as well as external factors.
The survey measured views on overall real estate conditions, values and availability of capital.
Most people taking part saw interest rate increases as inevitable over the coming year, and thought this would have widespread implications throughout the industry.
Capitalisation and interest-rate changes were seen counteracting strong demand for real estate, therefore keeping asset values mostly flat, the poll showed.
Even though respondents still saw debt capital as available, this availability was expected to become more selective and expensive in response to rising rates.
Equity capital was reported to be accessible for the right kind of assets, but the survey showed a concern that an increasing number of investors were finding opportunities abroad more attractive.
Earlier this month, new data from the Green Street Commercial Property index showed US real estate prices had fallen by 1% in July, intensifying fears rising interest rates would dent the property market recovery.