ECB / Robert Metsch
ECB
ECB Room
A new report on European Commercial Property predicts that the European Central Bank will feel compelled to take even more stimulus measures above and beyond last month's loosening, resulting in more benefits for prime property as a high-yielding bond substitute.
The report, by research group Capital Economics, highlights how the ECB’s recent measures aimed at combating weak growth and the risk of prolonged deflation has taken its QE purchases to €80bn a month from €60bn, cutting interest rates, and expanding its eligible asset purchases to include corporate bonds.
It also announced a set of targeted longer-term refinancing operations which could mean it effectively pays banks to borrow money. Capital Economics says this still leaves the central bank room for further expansion of either another €20bn a month or another six month extension, saying “And we fully expect it to do so, most likely in the form of further expansion of its QE programme”
The report shows how investor demand for prime property has been supported by monetary easing for five years, and as bond yields have fallen so have prime yields, with competition between bidders forcing buyers to become more aggressive on pricing.
The latest ECB package and further expected stimuli will continue to support the case for prime property, the researcher says. “We believe that prime eurozone property yields will fall for at least the next 24 months. And, although we expect the rate of yield falls to slow, we still expect a drop of over 40bp in 2016-18.”
While conceding that the ECB’s moves reflect poor prospects for economic growth in much of the region, which will keep office and industrial rental growth in check, this is expected to be far outweighed by structural factors driving prime retail rents.
But Capital Economics concludes by saying, “Whilst we believe the outlook for prime commercial property in the euro-zone remains positive, we would be far more cautious about extending this analysis to many ‘average’ or ‘secondary’ properties, particularly in non-central locations and low-growth economies.”
