Base decisions on liquidity, not interest rate changes

Even though the end of the low interest-rate environment is not yet in sight, the European Central Bank’s “tapering” – its gradual reduction of bond buy-backs – will have significant effects on European real estate markets.

So far, the ECB hasn’t touched the key lending rate for supplying business banks with funds. The main refinancing rate has stayed at 0.0, and no interest rate increases are expected this year. “All the same, the timing and procedure for normalising monetary policy still remain imponderable,” warns Dr Marcus Cieleback, Chief Economist at PATRIZIA. 

Even though the era of low interest rates isn’t over, there are early signs that central bankers might abandon the current ultra-easy monetary policy. One signal is a slow reduction of bond buy-backs. The ECB already suspended its bond buy-backs for a period of time at the end of 2017, and as the economic upswing continues the bank intends to halve its average monthly buys for 2018 to EUR 30 billion. The controversial buy-back program will continue until at least the end of this coming September. 

Liquidity a defining factor

How will the reductions in bond buy-backs affect real estate markets and investors? “The European Central Bank’s tapering will significantly influence liquidity – and therefore also pricing – in Europe’s real estate markets,” Cieleback concisely notes. This will be most evident in niche markets and less-established subsectors: The areas where bold cash inflows have been seen as the search for opportunities for returns intensified over the past few years.
It’s true that, as a rule, investors look first and foremost at changes in interest rates and at returns. “But we assume that the coming quarters will be defined most of all by market liquidity,” says the PATRIZIA Chief Economist. Accordingly, it will be important for commercial property developers to keep an eye on liquidity as an additional major indicator. 

When trying to discern European investment strategies, it’s essential for investors to understand the market’s changing dynamics. That applies not just to cities and growth regions but also to B, C, and D-ranked cities and to all risk classes.

Retail disruption

According to the “PATRIZIA Insight – European Commercial Property Markets 2018” market report, the trend in the office sector will remain positive throughout Europe for the next two to three years due to ongoing stable demand and relatively low completion rates. 

The European retail investment market, on the other hand, has seen declining investment volumes for the second year in a row. Causes include increasing digitalisation and growing e-commerce, which are causing profound changes in retail. The performance of peak rents indicates that even top-notch city-centre locations are being affected by “retail disruption.” Retail strategies need to be adjusted to the changing environment. “But investors shouldn’t compromise on asset location and quality,” Cieleback advises. 

Solid performance

Real estate prices as a whole are still rising. Total return, as a result, will tend to decrease slightly compared with previous years and the ECB’s still-expansive monetary policy is supporting growth in Europe. Cieleback summarises: “Given the sound economic fundamentals, we don’t expect drastic revaluations of good, high-quality properties.” And if investors apply their expertise to invest outside the top markets, they will ultimately contribute to the development of locations away from metropolitan centres.


Photos: Getty