Yesterday’s €60bn a month quantitative easing programme from the European Central Bank is ostensibly good news for property.
The scale of the programme caught many by surprise and there is a good chance it will make a genuine difference to economic growth and therefore occupier demand. In anticipation of the move and with the growing possibility of a rise in interest rates in the US, the euro has already fallen sharply in value in recent weeks. The currency is now likely to remain weak for some time, which will drive European exports and ultimately boost rental growth.
From a real estate perspective, the other big positive is the relative pricing effect of lower long term Eurozone interest rates. Property will have to yield less to retain the same premium over bonds.
Giving its reaction yesterday, Cushman & Wakefield predicted QE could help spark a 20% increase in European property trading this year and a 40-70bp yield fall. Without QE, it forecast just 5-10% rise in European investment and a 20-30bp yield shift.
However, there is still plenty that could still go wrong. As CBRE pointed out in its reaction, there is a danger that the euro could continue to slide. If foreign investors expect a long-term depreciation in the euro then these buyers will put a discount on European real estate to compensate for the anticipated currency movement.
Furthermore, it is important to remember why the ECB has taken this step. Economic growth in the Eurozone has weakened in recent months and forecasts from the IMF and others have looked increasingly bleak. Even the German economy is struggling as its manufacturing sector suffers from the slowdown in China and Russian sanctions. And there is a very real possibility that this weekend’s election in Greece will result in a messy exit from the Eurozone.
Stagnation in Europe means that rental growth has been almost unheard of in any of the continents major cities. There are plenty of potential negative forces that could outweigh the positives of QE and perhaps depress rents further.
At the same time, yields have already fallen significantly across Europe - the changes in pricing in Spain over the past 18 months are particularly staggering. In other words, a lot of the spoils for investing in the Eurozone have already been taken. QE may bring further rewards, but it is no foregone conclusion.