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Monetary Policy – March 2017

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European Real Estate Market : Changing monetary policy environment – challenges and opportunities in eurozone real estate

As at the end of February 2017, the European Central Bank (ECB) had purchased monetary assets of ca. EUR1.7 trillion under its extended asset purchased programme (APP). Translating this amount into concrete terms this equals roughly to 120 Channel Tunnels or 1,100 Burj Dubai Towers. ECB's monthly asset purchase volume of ca. EUR 60 billion represents almost twice the budget of "Grand Paris", Europe's current biggest infrastructure program. Negative interest rate policies and tightening regulation complicate investor's life. In the search for yield and return, asset prices, including real estate, have increased since the introduction of unconventional monetary policies across the world. Nevertheless, even though commercial real estate prime yields in Europe are at all-time lows, ultra-low government bond rates still make commercial real estate attractive for incomeorientated investors. According to CBRE, compared to 2015 investment volumes in eurozone commercial real estate have plateaued; however, with a total volume of ca. EUR 132 billion, the 2016 result was only slightly shy of the 2007 figure (ca. EUR 135 billion).

The current form of ECB's APP program is scheduled to last at least until the end of 2017. Improving economic data in the eurozone, including on the labor market and on core inflation, but also a diverging monetary policy to the US Federal Reserve, is raising the question on when the ECB might start tightening its monetary policies and what implications this may have on commercial real estate. There is no definite answer to this question as the world has never experienced such a period of loose monetary policy.

Source : UBS AG

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