Prime property in Europe is no longer driven by fundamentals and looks expensive, warned speakers at the launch of IPD’s pan-European Property Fund Index.
At the same time, a panel of industry experts described a cautious optimism about the European macro-economic outlook.
Speaking on the panel, Ben Penalligon, managing director of Prameriga, warned of ‘nosebleed prices’ on prime real estate. On the same panel Matt Ridley, director of research at Fidelity’s real estate department, described a market where prime assets are defined less by their location than by their lease length. Sabina Kalyan, chief economist at CBRE global investors, said that prime has become so focused that a large range of attractive investments have been tarred as ‘secondary’. They were joined on the panel by Melville Rodrigues of CMS Cameron McKenna.
Ridley described a European property market where the bulk of returns will come out of income. He said that the strong growth seen in the years of 2005 to 2008 would come to be seen as the aberration, rather than the rule. Ridley characterised the market as one which was not driven by fundamentals.
In her talk on the European economic outlook, Sabina Kalyan, who described herself as “habitually bearish” on the European economy, struck a note of cautious optimism. She was positive about the effects of the LTRO, and praised the new willingness of the ECB to intervene, saying that “the European Central Bank under Draghi is a very different beast”. Although Kaylan believed a default by Portugal, and a second default by Greece, were highly likely, she pointed out the controlled nature of the first Greek default, which saw the risk fully priced into markets before the event.
However, Kalyan went on to warn of the seemingly unsolvable problem of the debt to GDP ratio: cutting debt can restrict growth, keeping the ratio steady even as debt is reduced. She warned that the real risk to the European economy was not economic but political, with the Greek government struggling to enact further belt tightening in the face of a disgruntled populace. At the same time the “beer countries” of Northern Europe need a weak euro to maintain their exports, even as the “wine countries” long for a devalued currency.
Kalyen described prime office property as significantly overpriced, although tactical opportunities might still exist. She believes that industrial prime in Amsterdam, Paris and Hamburg look more appealing, as do shopping centres, although she believes that investment might be hampered by liquidity.
Her conclusion was that though the ECB has prevented a ‘Lehman style crisis’ the prospects of recession in the near term and below trend growth in the medium term would translate to falling rental values, and rising yields.