By Tom Leahy on October 10th, 2016
After three days at Expo Real in Munich, coalescing the many conversations and diverse views heard there into a coherent narrative is a challenge. The trouble is there were almost as many views on the market, the risks and – especially – the politics, as there were pretzels eaten at the show.
Three views appear to be less contentious than the many conversations concerning politics. The first is that after a period of above average investment volumes, European real estate is expensive: one meme that did the rounds is that “three is the new five” when it comes to German office yields. The second point most attendees also agreed on was that the alternatives to real estate still don’t look that attractive for asset allocators. Government and corporate bond yields are even more expensive and offer little to attract pension and insurance funds with future liabilities to match, and the equity markets are both volatile and expensive (see the current Shiller PE ratio).
Therefore at my panel session on Tuesday, which focused on yield compression and the direction for the European real estate market, a third consensus was reached: in a relative world, real estate still looks relatively good. Even if three is the new five in Germany, that still means a 300 basis point cushion between real estate yields and the 10-year bund, making the three look a lot more palatable to investors than it would have done in 2007.
With regard to politics and Europe’s largest market, London, I heard a variety of views on what Brexit would mean, ranging from “if you are a big international investor, you have to be in London” to forecasts of 30% pricing declines in the next 18 months. Admittedly, these views are not mutually exclusive, but preliminary Real Capital Analytics data indicates that London office investment volumes in Q3’16 were the lowest we have recorded since 2010. The arrival of a couple of handfuls of new entrants was not sufficient to plug the gap left by other investors, who have at the least pressed the pause button.
The Brexit vote was not the only political issue discussed at length in conference hall either. As the prospect of a Trump election victory in November is no longer the “joke” many Europeans had assumed it to be six months ago, it took up plenty of time. Closer to home, the outcome of the 2017 elections in France and Germany and November’s key referendum in Italy, one of Europe’s hottest markets, also caused much debate.
On reflection, at a time when politics across the Western world is more polarized than most can remember and central bankers are controlling the investment environment through their interventions, the fact that the external risks to the real estate market dominated so many conversations is not that surprising.