Return to search

EUROZONE: Turbulence ahead

After a tumultuous 2016 in Europe – which saw the UK leadership toppled, Italian Prime Minister Matteo Renzi defeated, a wave of terrorist attacks, a migrant crisis and a seemingly more aggressive Russia – one could be forgiven for hoping 2017 will be a calmer affair.

Yet the political roadmap is packed with parliamentary and presidential elections, constitutional referendums and inevitably, trade negotiations – events that will have their own impacts on the financial markets over the next 12 months.

Following the UK’s Brexit vote and Donald Trump’s election, real estate investors are keenly aware that upcoming elections in Germany, France and the Netherlands have the potential to deliver more market shocks.

In the Netherlands, Geert Wilders, the leader of the far-right Party for Freedom, is on course to win the most seats at the general election next month. If he does, Wilders has vowed to call an immediate in/out referendum, which could cause similar volatility to the Brexit vote for Dutch real estate, one of Europe’s most stable markets.

In France, Marine Le Pen’s Front National has been vocal about calling for an in/out referendum, a move which could damage Paris’s position as Europe’s financial center-in-waiting. Reports in the national media suggest that French assets are already showing signs of strain ahead of the April and May elections, a trend that would surely be exacerbated in the event of a far-right victory.

Although German Chancellor Angela Merkel is on relatively solid ground, she is weaker than at any point in her 12-year tenure. A recent report by law firm Nabarro suggested a victory by the right-wing AfD party in the German parliamentary elections in September could have a huge impact on real estate values and investor confidence, and could also prevent Frankfurt from replacing London as Europe’s financial hub.

Another interesting barometer for the European real estate market, however, will be seen in the reaction of financial markets when Article 50 of the Treaty of Lisbon is triggered in March. Once this two-year negotiation period is set in motion, there will be no turning back for the UK and a series of fraught and unprecedented trade negotiations can begin.

After all, if last summer’s referendum result could spark a pull back by investors, then it is possible that the official start of the process of leaving the EU could repeat such a reaction. The same could be said if either or all of France, Germany and the Netherlands opt to follow the UK’s lead and leave.

One well-known London-based real estate advisor compared the year ahead to flying a plane, saying that radars can predict bad weather in the distance but sometimes you can’t see what is much closer – and into which you are flying blindly.

Some Europe-based executives, such as Lars Huber, CEO of Hines Europe, are planning ahead. In a recent conversation with PERE, he spoke about the importance of getting his firm’s house in order, such as increasing occupancy and moderating leverage levels within its portfolio, in preparation for a potential market correction.

Plenty of arguments can be made as to why investors might be put off committing capital to an even more uncertain and volatile Europe. Historically, however, uncertainty has favored returns in higher-risk strategies, so those with bigger risk appetites may find potential opportunities in distress. For example, US private equity giant Blackstone made a killing following the global financial crisis through its opportunistic investments. But smaller investors, both retail and institutional, generally favor a lower-risk environment, particularly in times of uncertainty.

Many of the voices who predicted a victory for ‘Remain,’ Hilary Clinton and Renzi last year are the same voices forecasting victories for the status quo. But after the seismic fallout of Brexit, and the damage it caused to the EU, one should not rule out a Frexit, Dexit or Nexit that could undermine the union’s entire foundations, rendering debates over membership and trade negotiations futile.

To the polls: Key European elections in 2017

• March 15: Dutch parliament

• April 23: French presidential – first round

• May 7: French presidential – second round

• September 24: German parliament