EXPO REAL: ‘Non super-safe yields' will be rising in the eurozone

AEW Europe said investors should be demanding higher-risk premiums, according to the circumstances of individual markets, and that 'non super-safe yields' will rise across the board in the eurozone by year-end unless a ‘convincing solution’ to the crisis is found to satisfy financial markets.

Investors should be demanding higher-risk premiums, according to the circumstances of individual markets, the Expo Real property trade show heard today.

Speaking at the AEW Europe ExpoReal Seminar, Mahdi Mokrane, head of research and strategy at the firm, said: “There is something wrong with pricing relative risk in eurozone real estate markets when, say, Milan or Rome offices are now being offered at low yields of 5 percent to 5.5 percent or core Spanish retail at 5 percent in the middle of the sovereign debt crisis.”

He added: “We believe investors should be demanding higher risk premiums, according to the circumstances of individual markets, and that non super-safe yields will be rising across the board in the eurozone by year-end unless a convincing solution to the crisis is found to satisfy financial markets.”

Patrick Artus, global chief economist at Natixis, the French part owner of AEW, explained that the sovereign debt crisis in the eurozone had driven up banking risk and corporate risk, creating an environment characterised by high risk aversion, abundant liquidity and sluggish growth in the OECD countries.

Nevertheless, the economist said that on balance the EU would not collapse.

“We believe that at the brink of the precipice the EU will muster sufficient financial firepower and political will to refinance the banking system, allow an ‘orderly default’ of Greek debt and prevent the break-up of the eurozone,”Artus said.

Yet AEW argued that real estate pricing within the eurozone was not yet generally reflecting the possibility that contagion of the crisis wouldn’t be stopped and that a ‘two euro system may emerge, with a core bloc centred around Germany, and sharply devalued currencies in periphery countries forced to exit the euro.

AEW Europe analysed the core real estate investment market in the eurozone on the basis of two scenarios: a low probability that the eurozone would experience a catastrophic breakup; and a high possibility that it weathers the crisis, but faces a protracted period of anaemic economic growth.

The investment manager then weighted the risks of countries exiting the euro to produce an average probability risk yield premium relative to the yield a core asset should generate were the country certain to stay in the euro. For Germany, the Netherlands, Austria and Finland, this risk premium was nil given the state of their public finances. But for other individual eurozone core real estate markets, these yield risk premiums ranged from 10 basis points for France and Belgium, and 50 to 90 basis points for Italy and Spain respectively.

The annual Expo Real show is taking place against a backdrop of nervousness about the fragility of Europe’s economies.

Organisers of the event said that “mirroring the economic development in Europe, EXPO REAL has seen a downturn in participation figures from Southern Europe.” Contrasting with this, countries in Western and Central Europe are more strongly represented at the fair. This applies to Austria, the Netherlands and the United Kingdom. The Netherlands has almost doubled its number of exhibitors, and Amsterdam has a dedicated joint stand. Also exhibiting again after a break are China and Romanian participants.

Participants at the event said today that banks were passing on funding costs to property investors through margin increases.

Meanwhile, Cushman & Wakefield said New York had knocked London off top spot in terms of cities attracting the most commercial real estate investment.

Pleas have been made by some participants for insurers to step up efforts to fill the lending gap left by traditional property financing institutions. Allianz, the German insurance company, said it wanted to underwrite several billions of euros in property deals over the next five years, focussed on Germany.

CBRE, the property services firm, said yesterday that the volume of transactions in Germany was set to surpass the €20 billion mark in 2011. “All investors are looking for stability in a world where the only stable thing is instability,” said CBRE´s chief executive officer for Germany, Peter Schreppel.