Finance still the key challenge
As the property industry packs away the stands at MIPIM and heads home in a fleet of taxis bound for the airport or rail station, amid all the talk of optimism and increased activity, consider these points from CB Richard Ellis on the greatest challenges facing the European property market this year.
The firm says its survey of almost 350 European property investors finds that (surprise, surprise) financing is the key to it all. The shortage of debt finance, and the effect on the market of inflation and rising interest rates, will be the greatest restricting factors for the market in 2011. CBRE points out that this is a sharp change in attitudes from the previous year, when it was considered that demand-side risk in the occupational markets was the greatest threat to the market, along with worries about a double-dip recession.
Around 20% of the investors surveyed by CBRE identified the effect of continued restricted credit conditions and above-target inflation, rising bond yields and expectations of higher interest rates as key concerns. “Over the past few months there has been a sharp increase in medium-term interest rates – for example, the German 10-year government bond yield has increased from a low of 2.15% in August last year to around 3.15% now. This is increasing the cost of capital to banks and thus the rates at which those lenders who are still active are prepared to lend,” the firm points out.
Peter Damesick, EMEA chief economist at CBRE, commented: “Real estate is often considered as a hedge against inflation, but this is true only to an extent and depends on the source and nature of inflationary pressure. Indexation (which is the norm in most of Europe) provides short-term protection against inflation, but this is only sustained if underlying rents also increase in line with inflation in the longer term, which requires some strength in occupier demand. The cost-push inflation that is affecting Europe at the moment, driven by currency weakness and increases in oil and raw material prices, is much less likely to lead to increases in rental value. History also tells us that if higher inflation induces tighter monetary policy, that can prove negative for property performance.”
The concern about interest rates, inflation and the shortage of finance explains the increasingly negative view of secondary property also revealed by the survey. The availability and cost of debt is even more significant for this sector of the market, where leverage levels have historically been higher, notes Phillip Cropper, managing director of real estate finance at CBRE. “Currently there is very little appetite to lend on secondary property where the market perceives there to be significant tenant and leasing risk. This is unlikely to improve for a considerable time, and this is likely to impact pricing,” he notes.
The firm says that nearly three quarters of those surveyed expect the large yield gap between prime and secondary property to persist, or widen further, during the year. Nearly a third of respondents think it will be 2013 or beyond before the market conditions would be right for them to buy secondary property.
