We are experiencing interesting times for world economies and real estate. The U.S. economy is accelerating, China is slowing and European economies are a mixed bag. Many think European real estate is at a crossroads right now.
The bears for European real estate cite a number of concerns as red flags for the market, including valuations near peak levels, a flood of capital coming into the market and years of record low interest rates driving more aggressive bidding. Some point toward shifting investor sentiment as a strong indicator. For example, Union Investment recently surveyed investors and found “72 percent of German investors, 84 percent of U.K. investors and 52 percent of French respondents planned to focus their investment teams on taking profits and rebalancing portfolios.” Click here to read more.
However, when you look at past market tops, we don’t see the usual suspects — such as new excess supply or overly leveraged funds and investors — being an issue. The new bank regulations seem to be keeping lending in check. The rise of alternative nontraditional lenders (private equity firms, for example) seems to have picked up the financing void left by banks. The risk is these nontraditional lenders don’t have the same regulatory checks and balances to prevent them from being overly aggressive. The advocates for this type of lending claim market forces will keep lending in check. Of course, market forces didn’t keep publicly traded banks from being overly leveraged and lending too aggressively to the real estate sector in 2007. Could this be the Achilles heel in today’s market?
Bears also will point out cap rates are low by historical standards. On the other hand, bulls are happy to point out a number of markets are fairly valued on a spread basis when compared against government bonds. E.U. inflation is trending well below the European Central Bank’s 2 percent target, which implies continuation of low interest rates for a while — a big plus for current and future pricing. Other bulls point to the changing profile of investors coming into the market as a reason to be bullish and buy now rather than later. These investors include sovereign wealth funds, which have a supply pipeline of capital and look to buy and hold for the long term. When the SWFs snap up property, it could be off the market for years or decades. What is expensive today might not even be an option tomorrow. That leads to the question: If you sell today, where and how do you redeploy capital? We are in a world awash in capital with a limited number of attractive investment options. In many ways, we are in uncharted territory.
All of these issues are a backdrop for our Bull/Bear Exchange on Europe’s Property Markets at VIP – Europe, which takes place February 23–25, 2016, at The Grand Hotel Eastbourne in East Sussex, U.K. During this interactive exchange we will examine what regions, countries, cities and strategies are attractive or fully valued. To make the case for or against different opportunities, we will examine where are we in the cycle and where are we headed in terms of prices, valuations, supply/demand trends and more.
To see our agenda and reserve your spot, click here.
Hope to see you there!
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John Hunt is conference program manager of Institutional Real Estate, Inc.
