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November 6, 2019

(Photo by Bernd Kammerer – Pool / Getty Images)

Christine Lagarde taking the helm of the European Central Bank last week has sent real estate investors sifting through possible policy shifts.

What they’ve discovered, at least for now, is business as usual.

Lagarde, the ECB’s first-female president, is broadly expected to stay the path set out by her predecessor, Mario Draghi. Crucially, this means the pursuit of the central bank’s bond buying programme that restarted this month.

“It’s been a good four years since the ECB began buying assets through its quantitative easing programme, so this month’s restart really means more of the same,” says Michael Kavanau, EMEA debt advisory at JLL. “Investors are therefore familiar with the outcomes of that.”

The QE programme will see €20 billion in bond purchases a month and sits alongside borrowing rates at record lows. These policies are aimed at bolstering economic growth and should galvanize further the unprecedented appetite for commercial real estate. A record US$330 billion of dry powder is targeting the sector globally.

“Low rates are a big motivating factor for investors who may be considering Europe for the first time, as well as those seeking to take advantage of the opportunity to lock in attractive fixed rate refinancing,” Kavanau says.

“There’s been a move away from floating to fixed in the past three years, particularly among those who anticipate holding their assets for longer and through to the next cycle,” he says.

Equally, such low rates have made real estate “one of the few strong sources of return”, he says, pointing to the US$ 17 trillion of negative yielding sovereign debt.

“Zero interest rates in Europe are just another compelling reason to consider the region’s real estate, which can offer meaningful returns, generally higher than in other asset classes,” Kavanau says.
Other central banks around the world are also maintaining low interest rate policies. In its third cut in four months, the Federal Reserve recently lowered the target for its benchmark rate to a range of 1.5 percent to 1.75 percent.

“While investors from across the Atlantic have found the comparatively lower base rates of Europe attractive, currency has in parallel played an equally important part in geographical decision-making,” says Kavanau.

Europe, despite employment reaching a record high, is not without its woes, with business confidence down. And the International Monetary Fund has forecast economic growth of just 1.2 percent this year and 1.4 percent next year for the eurozone.

“Central bank monetary policy can only do so much,” says David Rea, chief economist for EMEA at JLL. “If there is no demand for credit, QE is the economic equivalent of pushing on a string. If Europe’s economies are slowing, a fiscal response is required.”

However, Rea says most European economies are “fairly well-positioned to be able to provide some stimulus, with modest fiscal borrowing, sustainable debt levels and very low borrowing costs.”

Click to find out more about what Europe’s economic outlook means for its real estate market.

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Michael Kavanau

EMEA debt advisory at JLL

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