A new report from investment bank Natixis and its property affiliate AEW Europe unveiled at a seminar during the Expo Real trade fair in Munich indicates that a two euro system may emerge.
‘The sovereign debt crisis in the euro zone has driven up banking risk and corporate risk, creating an environment characterized by high risk aversion, abundant liquidity and sluggish growth in the OECD countries,’ said Patrick Artus, global chief economist at Natixis.
‘We believe, however, that at the brink of the precipice the European Union 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 euro zone,’ he explained.
Sylvain Broyer, deputy chief economist at Natixis, added; ‘The abundance of liquidity is only benefitting safe haven assets, including gold and a select few government bonds. This category doesn't include emerging market assets, for example’.
Real estate pricing within the euro zone isn’t yet generally reflecting the possibility that the contagion of the crisis won’t be stopped and that a ‘two euro’ system may emerge, with a core bloc cantered around Germany, and sharply devalued currencies in periphery countries forced to exit the euro.
AEW Europe has analyzed the core real estate investment market in the euro zone on the basis of these two scenarios: a low probability that the euro zone will 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 is nil given the state of their public finances.
But for other individual euro zone core real estate markets, these yield risk premiums ranged from: France and Belgium – 10 basis points (bps), Italy and Spain – 50 and 90 bps respectively, and Greece – 375 bps.
‘We think that whatever the scenario, the search for safe havens could be beneficial for core long leased properties in the safer euro zone countries. And these properties will command ever sharper yields,’ said Mahdi Mokrane, head of research and strategy at AEW Europe.
‘However, there is something wrong with pricing relative risk in euro zone real estate markets when, say, Milan or Rome offices are now being offered at low yields of 5% to 5.5% or core Spanish retail at 5%, in the middle of the sovereign debt crisis,’ explained Mokrane.
‘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 euro zone by year end unless a convincing solution to the crisis is found to satisfy financial markets,’ Mokrane added.
