Effects of ECB’s monetary policy on RE investment – conference
BNP Paribas REIM are continuing the tradition of their predecessor iii-investments in recently hosting the (by now) 6th Institutional Real Estate Symposium in Munich. This year’s event attracted about 130 participants for a day of primarily examining the likely present and future effects of cheap money and the ECB’s expansionist monetary policy on the real estate investment market.
From the outset, participants and panellists were agreed that, as a consequence of the ECB’s monetary policy, German core real estate has become even more sought after by yield-seeking investors. At a historically high average yield advantage of 400 to 500 basis points over risk-free government bonds, the global wall of money is naturally attracted to European and German bricks and mortar, and as such cities such as Munich, Hamburg and Stuttgart with limited scope for new building are acting like a magnet attracting these funds.
The opening presentation was given by Reinhold Knaus, Senior Economist at BNP Paribas, who issued a clear warning that the current desperate search for returns on the capital market could have dire consequences for investors, tempered somewhat perhaps by the positive benefits of the falling price of oil. Nonetheless, in his view the divergence in the various monetary policies of the eurozone, the USA and Japan as well as key emerging markets is bound to increase and lead to heightened volatility. Investors are therefore advised to define their objectives clearly and to pursue different strategies based on priority, i.e. current yield, value growth or capital preservation.
Robert Halver, Head of Capital Market Analysis at Baader Bank and stock market insider, referred to a "dispassionate hike in share prices". In a lively presentation, he cautioned that the fundamental laws of the capital market are being invalidated by the ECB’s current monetary policy, which are having the effect of preventing interest rates or returns from rising.
Nonetheless he continued to view the stock market overall in a positive light despite current high valuations, saying the ingredients for a stock market crash are not present. On the contrary, the development of the global economy, energy prices and monetary policy should serve to buoy up the markets further, in his view. Halver ended his presentation with a plea for attributing higher valuations to phyically tangible assets, such as real estate, in the portfolio of institutional investors.
A further optimistic view was put forward by Stefan Janotta, Head of Research at BNP Paribas REIM Germany. With Europe’s economic upsurge, he expects rents to increase through 2018, with the result that current income from real estate should attract greater attention from investors. He views the shortage of supply in core properties across Europe persisting into 2017 or after, not least due to the unwillingness of many portfolio holders to sell.
While interest rates remain low, total returns from real estate of more than 4% are considered realistic. At the same time, (core) properties offer distributions of 4.5% to 5.5% after deduction of currently low financing costs, and a spread of 400 to 500 base points compared to the yield on government bonds. Janotta is forecasting that depreciation will take place only after a significant rise in interest rates. With keen competition for core assets, he believes the value-add segment provides a smart alternative, with the emphasis on prime locations. Investors should be circumspect about new core-plus properties in B-locations, where it is frequently noted how difficult it can be for the rents for existing rental contracts to be maintained upon re-letting.
Another plea for an increase in the real estate investment allocation came from Hauke Brede, Chief Risk Officer of Allianz Real Estate, given the low interest rate environment. Real estate increased the diversification of the entire portfolio of an institutional investor compared to other asset classes. The potential for returns, the sensitivity to inflation and the lower levels of volatility were considered additional advantages of greater capital allocation in real estate. According to Brede, the risk return profile of real estate lies between bonds and equity. In this regard, they only show a low level of correlation with other asset classes, but concurrently have greater potential for additional appreciation when subjected to active asset management to raise their value.