ECB’s Bond Buying Program Expected to Boost Commercial Real Estate Sales

Commercial real estate analysts were projecting that 2015 would be a strong year even before Thursday’s quantitative easing announcement by the European Central Bank.

The real estate services giant had been projecting a 5% to 10% increase in commercial real estate sales volume in 2015 over 2014. If the ECB’s €60 billion-per month bond buying program pushes interest rates down as expected, the increase in volume would be more like 20%, Mr. Hutchings said.

Cushman & Wakefield is now projecting that, with quantitative easing, European sales volume in 2015 would hit €268 billion, which would tie the record year, 2007.

Mr. Hutchings said that quantitative easing would help commercial real estate sales partly because, as the ECB buys bonds, investors who would typically buy these bonds are going to be displaced. They’ll look around for other investments and real estate will be particularly attractive because it offers higher yields than bonds.

“There will automatically be a ripple effect pushing investors out to other assets,” Mr. Hutchings said.

Also, if the ECB is successful, the bond buying program would spark economic growth in Europe that also would also benefit commercial property, by driving up rents and occupancy rates. “There hopefully will be an improvement in the economic situation which makes property a better asset,” he said.

Increased demand for property would likely push prices up higher. Before the ECB’s announcement Thursday, Cushman & Wakefield had been projecting that the yields investors get when buying commercial real estate—from property income–would fall 0.2% to 0.3% in 2015. Falling yields reflect rising prices.

Now Cushman & Wakefield is projecting yields will drop 0.4% to 0.7%. The increase in prices should also encourage more sellers into the market, the firm says.

But the forecast isn’t all rosy. Much depends on the ECB’s strategy working.

If quantitative easing doesn’t succeed in sparking economic growth, rents and occupancies won’t rise as fast as prices have been rising. Under such conditions, the increasing values that the market has seen in recent years aren’t sustainable, Mr. Hutchings said.

“We will be working towards a capital bubble without fundamental support,” he said.

Source: Wall Street Journal