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7 January 2019, Europe | Corporate Finance | News

Real Estate Investments in Europe – Monetary Turnaround on the Move?

At the beginning of 2019, qualitative sentiment patterns and quantifiable fundamental values collide once again. Both belong together in the markets, and it is precisely the supposedly objective weighting of both factors that forms the basis for future behaviour and action on the capital and real estate markets. This is usually noiseless when sentiment and fundamental indicators are largely synchronised - as has usually been the case over the past five years in Europe.

However, sentiment indicators have clouded over in recent months, while economic indicators remain close to record levels, albeit weakening somewhat. So is sentiment ahead of an economic downturn in 2019, as currently suggested? As a result, the trade-off from "continued good economic conditions" will lead to "rising rents and higher interest rates" and thus to "falling net initial yields".

A bundle of supposedly political-economic risk factors is usually used for this argumentation: be it the trade conflict between the USA and China, EU-Russia, Russia vs. Ukraine, Brexit exit, Italian banks or an interest rate turnaround in the euro zone. Real estate investors must also take these short- to medium-term factors into account and quantify them in their investment decisions. Risk analysis here is the sober paraphrase before any investment.

Not least for this reason, we have placed the focus on capital market effects in the current Market Tracker "Real Estate Investments in Europe - Monetary Turnaround on the Move", knowing full well that moods are made less by changes in interest rates than by headlines in the short term.

So it is not really surprising that we are still predicting a generally favourable situation on the real estate markets for 2019. But in this general discussion about turning points, scenarios should be formed. This is exactly what we have done in order to be able to rationally counter any possible surprises.

Did you know that

- with an interest rate rise of 170 basis points on a fictitious European government bond until 2022, a rent increase of up to 33% has to occur in Berlin and Dublin in order to stabilise the market values of office properties?

- At locations such as The Hague, Antwerp or Duisburg, an interest rate turnaround has hardly any effect on current market values?

For the coming years, we expect rents in the cities to rise slightly on the one hand due to the continued favourable economic development. On the other hand, however, it cannot necessarily be assumed that the number of multipliers will continue to rise due to the expected more restrictive monetary policy. If the European interest rate level rises again in 2019, alternative investments will be partially replaced by fixed-income investments. Rather, it is to be expected that the market will experience a decompression of returns. Due to robust economic development and moderate construction activity, it can be seen that a loss in market value resulting from the capital market can be compensated by rental price developments.

As you can see, the focus on a possible change in the capital market, in this case a "change in interest rates", should not lead - naively correlated - to an automatic reduction in market values.

 

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