One industry that might profit from the new phenomenon of negative bond yields is mattress makers: there should be a rush from savers looking for a new place to stash their cash.
This uncharted voyage into economic La-La Land could have profound consequences for property.
Negative yields and the onset of quantitative easing (QE) in the eurozone spell even more gloom for savers and a conundrum for investment institutions. In the eurozone in particular, however, they could administer a dose of adrenaline for property markets - at least while the medication lasts.
Deflationary pressures and moribund economies across most of the Continent prompted the European Central Bank in January to ape the UK and US and crank the monetary printing presses into action, with a larger-than-expected €60bn per month bond-buying programme. The rush to buy government bonds and other assets pushed their prices up and their yields down. Now many are in negative territory.
A negative yield occurs when you pay more for a bond than its par value plus the accumulated interest it will pay you over its life. So, if you pay €110 for a four-year bond that has a par value of €100 and delivers annual interest of €2, you will only get back €108 when it matures. The €2 loss represents a -1.8% return on the initial €110 outlay.
First short-dated treasuries, then increasingly ‘benchmark’ 10-year government debt has been moving into negative territory. A major factor was a flight to safety. The first market to succumb was that bastion of financial stability, Switzerland, then Germany, Austria, Finland and, bizarrely, Spain. Now at least one corporate, Nestlé, has followed the same path. Corporate debt is typically considered riskier than sovereign, but the Milkybar Kid’s creditworthiness is considered so unimpeachable that investors are in effect paying to lend his owner four-year money.
In a world of negative yields anything with a plus sign has been attracting global capital flows, pushing prices up and yields down further. And property is at the forefront. This might partly explain, for instance, the £3.3bn (and counting) frenzy of UK student housing purchases by US, Canadian and Russian investors in the past two months. Market leader Unite, which raised £115m with a stock market placing mid-month, reckons this wave has pushed down yields by 50-75 basis points.
But it is in the heart of the matter, the eurozone itself, that the greatest impact could be felt. Property markets on both sides of the pond were major beneficiaries of QE, as were equity markets. For instance, since the practice was introduced in late 2009, the FTSE EPRA/NAREIT index for UK commercial property shares has gained 185%, outpacing a not unimpressive 93% delivered by the FTSE All Share.
Eurozone markets could benefit from a positive double whammy. First, there should be downward pressure on yields, pushing up capital values. Added to this is the wider economic impact of a falling euro, which has been lurching further towards parity with the dollar since ECB president Mario Draghi unleashed the bank’s stimulus package. A low currency is good for nations dependent on exporting (before inflation rears its head) and should encourage inward investment (unless, of course, there is a fear it will head even lower).
The EPRA share index for European commercial ex-UK has risen 12% since the onset of easing. Ironically, the property market that could be among those to benefit most is that of Germany, which fought tooth and nail against its introduction. It has become a lot easier to tempt buyers of shiny new BMWs and Mercs beyond the German border - particularly to nearby Switzerland, which has seen its currency rocket.
Both commercial and residential markets could also gain a fillip from lower borrowing costs. (A snippet overheard on the BBC’s Wake Up to Money programme suggested a Spanish mortgage lender was paying borrowers.)
One nagging worry lurks, though. I recall many years ago the Financial Times’ Lex column sagely observing “nothing destroys value more than cheap money”. A financier enthused to me recently that “with negative yields you’d be crazy not to buy property”. A little ebullient perhaps, but when crazy people start paying crazy prices to buy crazy assets it’s normally time to bail out.
Right now, that fear is probably premature, but - possibly two or three years down the line - if monetary life support measures spark the next wave of irrational exuberance, it may be time to take cover and head for that mattress.
Alastair Stewart is building and property analyst at Progressive Equity Research