Risk On! QE Will Boost Eurozone Property Markets
The European Central Bank’s decision to engage in quantitative easing (QE) has transformed the outlook for commercial property markets in the Eurozone. The ECB announcement that it will be injecting €60 billion a month in liquidity through bond purchases from March this year until “at least” September 2016 indicates a minimum total of €1.1 trillion will be injected into the Euro zone economies. In addition, Mario Draghi stressed that QE can and will continue beyond September 2016 if necessary. The program will not cease until the governing council “sees a sustained adjustment in the path of inflation” consistent with its inflation target.
How big is the ECB’s move? To put it in context, the ECB will have cumulatively added more to its balance sheet since 2007 (as a percentage of GDP) than either the Fed or the Bank of England by the end of 2016 according to economist Gavyn Davies. In other words, the impact of the ECB’s QE program has the potential heft to be a game changer.
The positive boost to property will be driven in part by lower bond yields throughout the Eurozone. Lower bond yields highlight the relative attraction of Eurozone property which, as an asset class, currently offers an income premium over bonds. As investors shift exposure from bonds to property, it follows that the first effects of this move will be seen in good quality assets let to high quality tenants with secure income streams.
But, secondary property assets will gain an immediate boost too thanks to the steep decline in the Euro exchange rate which makes all properties cheaper in foreign currencies like the US$. The combination of lower bond yields and a cheaper Euro is a potent enticement for global investors to shift some exposure to Eurozone property, including the riskier sort.
While rental recovery will have to wait until better economic performance and corporate confidence feed into higher occupier demand, the risk-return equation for global investors has already improved. New calculations as to where the best risk-adjusted returns now lie are being churned out by analysts as I write this. The impending flood of liquidity may also trigger a rush of animal spirits to property markets that were already enjoying reasonably strong performance.
Although an economic recovery in the Eurozone is not guaranteed by QE, the odds have certainly altered for the better. It’s widely acknowledged that the Eurozone still needs structural reforms for its economies to achieve a permanently higher growth trajectory - and there is no certainty these reforms will be delivered. Nevertheless, the capital and currency market impacts on property pricing will be seen far in advance of fundamental improvements in occupier demand.
The green light for ‘risk on’ in Eurozone property markets is in high vis mode.