European real estate markets are set to continue to benefit from their ‘safe haven’ status in the face of the emerging markets slowdown, global monetary policy divergence and increasing political tension in the Middle East, according to Savills Investment Management.
In its Outlook for 2016, Savills IM suggests that the Federal Reserve’s decision to raise interest rates is positive for real estate markets in Europe and Japan, whose central banks are expected to maintain their quantitative easing programmes for at least another 12 months.
Kiran Patel, Chief Investment Officer at Savills IM, says: “Concerns about a hard landing in China and the pressure on emerging market currencies, coupled with geopolitical tensions in the Middle East, are resulting in net capital outflows from these regions into liquid European property markets, which are seen as safe havens.
“There is a great deal of global capital chasing a limited amount of core stock. With real estate yields comparing favourably to government bonds and equity markets experiencing turmoil, the implications for property asset prices are positive in the short term.”
With economic growth expected to accelerate modestly in a number of countries, real estate stands to benefit from improving occupier markets, limited quality supply and historically low government bond yields. Rents still have momentum given the underlying dynamics.
However, optimism is tempered by several downside risks including ongoing declines in oil prices, which could result in a slowdown in the pace of real estate asset accumulation by sovereign wealth funds and impact on yields in gateway cities such as London, New York and Paris.
Patel says: “Strong headwinds mean that we are continuing see strong demand for core investment product. Given low prime property yields and the shortage of prime investment product, we expect investors to increasingly target secondary property in the best markets. A movement up the risk curve is required for better risk-adjusted returns.