DTZ study sees easing of QE likely to hit commercial property

Like many involved in the global real estate comings and goings, we at REFIRE have had difficulty keeping up with the current state of play at property broker DTZ, so numerous have been the rumoured (and actual) changes in ownership and strategic direction of the firm over the past six years. The company was last acquired by its current owners, Australian engineering company UGL in December 2011, who earlier this year announced a restructuring review of its combined interests.

After the review, UGL announced in August that it plans to demerge DTZ by separating UGL’s engineering and real estate interests, and creating two separate companies listed on the Australian Stock Exchange. DTZ will then again be trading as a standalone property services company, once its parent company provides it with a sustainable capital structure to survive on its own. Realistically, this is unlikely to happen before 2015, given all the regulatory and shareholder hurdles it first need to surmount. DTZ has 45,000 employees worldwide, and a turnover of €1.5bn.

DTZ’s research department carries on going about its work, however, and its latest research study points to the dangers European and US commercial property markets are likely to face should central banks unwind their quantitative easing (QE) measures earlier than expected should economic growth resume strongly.

The study has a certain bias, in that in REFIRE’s view real growth is more likely to resume in the US than in Europe over the next couple of years, with little talk from the European Central Bank of anything other than “doing whatever is necessary” to support the European currency at the moment.

The study analyses two different scenarios – one in which QE is unwound in a timely and orderly manner (the ‘tapering’ referred to by the US Federal Reserve), and the other in which bank support is removed rather more abruptly.

The DTZ researcher conclude that, if the US or European central banks move to withdraw QE early – as many market participants have feared – commercial real estate pricing would deteriorate in all markets, with a much sharper rise in bond yields under this scenario, as well as slower economic growth.

"In short, early QE withdrawal makes office markets less attractive, despite the limited probability of this scenario playing out," it said.

It added that this scenario had become more relevant after comments from the US Federal Reserve earlier this year predicted an earlier-than-anticipated withdrawal from QE measures.

Early withdrawal could provide an unexpected short-term surge in the economy next year, DTZ predicted, in which case central banks would then be likely to withdraw QE more quickly. This would lead to a sharper rise in bond yields and slowing economic growth, with the US entering recession in 2016, according to the report. Rental growth would then suffer, and office yields would be much higher compared with the orderly withdrawal scenario.

However, if central banks effect an orderly unwind of QE, 16 of the 20 office markets would look attractively priced, DTZ said.

Although rises in bond yields driven by QE withdrawal would drive property yields higher, this would be mitigated by lowered risk premiums and better lending market conditions overall.

The report predicted the eventual unwinding of QE would imply a sustainable recovery in the economy, giving rise to a stronger jobs market and stronger occupier demand coupled with limited new developments, resulting in robust rental growth.