It was all so good! And then it wasn’t.
The big news in Europe this month was the shockingly badly communicated European Central Bank “big bazooka”. The ECB cut its policy interest rates, increased its Quantitative Easing programme; started buying corporate bonds; and will provide essentially free liquidity to banks until 2021 in its TELTRO2 scheme.
The market reaction was initially positive - the Euro fell and stock markets rose. But then Draghi said the ECB was unlikely to cut the deposit rate further into negative territory because of the problems this would cause the already beleaguered banking system. Suddenly markets became worried that this was the last hurrah of “whatever it takes policy”. The Euro then moved higher and stocks fell sharply – only partially recovering their poise thereafter.
For European real estate the main take away is that interest rates are likely to remain incredibly low until 2021. Now that the ECB is buying corporate bond yields this should also mitigate any possible contagion and widening of corporate spreads emanating from the USA. This will put increased downward pressure on real estate yields out of proportion to the modest improvement in the leasing environment. Core returns will trend lower, but compared to negative yielding bonds, real estate continues to win the “contest of uglies”.
Source : CBRE Global Investors