ECB’s QE Announcement Removes Uncertainty From European Real Estate Market
€1.1 trillion programme to prolong low Eurozone interest rates and further competitive € exchange rate environment
Dr Neil Blake, Head of EMEA Research, CBRE:
The size of the full Quantitative Easing announced today by the ECB has exceeded many expectations and the Eurozone’s commercial real estate market should benefit in the short to medium term from the removal of uncertainty around potential interest rate raises and currency fluctuations.
In the text book version, QE leads to more funds being available to banks and to more bank lending. However, there is little evidence of this having happened in either the UK or the USA when they ran QE programmes and, in any case, many European banks are not short of funds. Rather than having a direct impact on bank lending, the big benefits for real estate from QE come from low long-term interest rates and a more competitive exchange rate. Lower interest rates push up the value of property through a relative pricing effect (government bonds yield less income so property will be required to yield less. In other words property prices will rise). Low interest rates are also a boost to the economy which will ultimately benefit rental values. A more competitive exchange rate also benefits the economy by boosting exports and by making imports less price competitive and this will also feed through to occupier markets and higher rents. QE might not be a panacea for low growth in the Eurozone but it will not do any harm either and taken together with the fall in oil prices, the Eurozone economic and property market outlooks now look brighter than they did only a few weeks ago.
To a large extent, some of these benefits are already been enjoyed. Speculation about QE has led to record low interest rates and an expectation that rates will start to increase earlier in the US has led to a euro slide. Today’s announcement will now serve to lock these benefits in for longer. Long-term interest rates are unlikely to increase much before 2016, and low inflation, driven by falling oil prices, will also help to keep the lid on rates. The euro is likely to to depreciate further in the short-term as markets digest the implications of the announcement though it could then stabilise once the adjustment has been made. The only potential downside for continental European real estate is if foreign investors start to expect a long-term depreciation of the euro (two or more years). If this happens we should expect to see a discount placed on European real estate by these buyers to compensate for anticipated exchange rate movements. This will offset some of the gains listed above.
So many expectations had developed around today’s announcement that if the ECB had not made a move there would have been severe disappointment and an immediate rise in the euro and the chance of a reversal of some of the recent interest rate declines.
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