Europe’s QE—Good or Bad for CRE?

How will the European Central Bank’s large-scale quantitative easing program play out for the industry? Cushman & Wakefield’s EMEA Capital Markets team weighs in.

In response to the European Central Bank’s announcement about the large-scale quantitative easing (QE) program, Cushman & Wakefield’s EMEA Capital Markets team forecasted better than expected performance ahead.

This performance will result in consolidating recent bond yield and currency falls and paving the way for higher inflation expectations and better GDP growth.

Cushman & Wakefield predicts that without QE, the market would be expecting a 5-10 percent increase in European investment volumes this year alongside a 20-30bp prime yield fall. A successful QE package delivering lower for longer borrowing costs, however, would see more growth and some reform, and its forecast would grow to a 40-70bp yield fall and a 20 percent plus jump in property trading.

“In the year ahead, our expectations are that the market will fare better than most people currently expect,” David Hutchings, Cushman & Wakefield’s head of EMEA investment strategy, told Commercial Property Executive. “The improved performance will be most notable in terms of investment activity and capital pricing.”

While it’s still unknown whether the action taken by the European Central Bank will also provide the economic boost that is being targeted, at present, the corporate mood is positive.

According to Hutchings, better-than-expected performance will be driven by two factors: the fact that interest rates will be driven down to a lower rate and will remain low for longer than expected, which will provide a platform encouraging investment and re-pricing; and an increased demand in the bond market, which will displace investors into other sectors and make real estate an even more attractive asset.

“If the QE program is successful, the impact on property markets in general could be substantial as even more demand will now be diverted into the market,” he added. “As a result, yields are set to fall more than expected and volumes will be pushed further back towards record levels.”

In terms of the CRE impact, Hutchings noted the main differential will be the levels of income and security of income from property that will clearly be critical to investors displaced from the bond market.

“Secondly the demand created in the occupational market if quantitative easing is successful in stimulating investment, will be for modern property, which in many cases will demand a restart to development,” Hutchings concluded. “It will also be highest in areas embracing reform, such as Spain.”

While Cushman & Wakefield expects the capital market to react favorably and see much stronger performance, the occupational market should also benefit but first must await the results of QE in influencing inflation and on the structural reforms to be encouraged from governments around the eurozone.

Also, Hutchins said, expect increased interest in a range of global markets as Europeans export capital in search of opportunities, and also a move back into development, helped by recent falls in commodity prices softening build costs.