Property companies and property investment funds will benefit from low interest rates across Europe over the next two years or more, that’s according to research by JP Morgan.
Continuing low interest rates and spreading rental growth across Europe give support to a positive two-year outlook for Europe’s listed property sector.
Investors in European listed property companies will benefit from about two years of low interest rates, rental growth and rising asset values, J.P. Morgan Chase & Co. analyst Tim Leckie told the European Public Real Estate Association’s (EPRA) annual conference last Wednesday, reported by Property Magazine International (property-magazine.eu).
Tim Leckie, J.P. Morgan’s real estate analyst, said:
“Rental growth is spreading to Germany, Spain and Ireland after appearing first in the U.K. and this is very positive for net asset values of listed property companies.
The summer’s turmoil in financial markets has probably pushed back a rise in interest rates or will slow the speed at which they will rise. This means for the next 24 months or so there will be a continuation of the positive environment for the property industry, “broadening rental growth and rising property values against a backdrop of historically low interest rates.”
Leckie said that the recent slide in global stock markets presents an attractive opportunity to buy listed real estate stocks to capture the rental growth and the appreciation in property values, based on the latest research by Leckie and fellow J.P. Morgan analyst Neil Green.
According to Leckie, the U.K. currently offers the best prospects in Europe, with the IPD All Property Index showing that rents have risen by 1.2% since March 2015, though he forecasts the pace of rental increases will slow steadily through to 2019.
Not surprising in the UK, Europe’s fastest rental growth is in London, with the cost of occupying offices in the City of London financial district or the West End rising by 44% and 34% respectively since the first quarter of 2009.
Contrast this with office markets in Europe’s other major cities falling, or growing by no more than 5% in the same period. Leckie said.
However, Leckie thought that a pipeline of new developments in the City of London office market will mean that rents will probably “turn negative from 2018 due to oversupply”.
According to the J.P. Morgan analysis, continental European rental growth is concentrated mainly in the German, Spanish and Irish markets.
As consumer confidence returns, low inflation driving retail sales higher, coupled with supply constraints and falling vacancy rates means: (1) office rents in Frankfurt, (2) German residential assets, increasing rents by 2-3% a year and (3) shopping centre rents in Europe’s largest economy will strength.
In the Irish economy, falling vacancies and supply constraints mean that the Dublin office market can expect annual rental growth of 12%. A similar situation in Madrid will start to feed through to 10% annual growth in rents predicts Leckie.
In Amsterdam, Holland, office rents appears to be bottoming out but in Paris there is still no evidence of a pick-up in rental growth to warrant the considerable appreciation of office values, which suggests to JP Morgan that assets may be overvalued.
JP Morgan’s assumptions on this are based on indications they perceive of “measured interest rate increases by the Bank of England for the next three years” and prospects of the European Central Bank holding off until late 2017 or early 2018 before raising rates.
All this would mean that there is ample scope for property values to continue to rise when capital growth is supported by rising rents.
Listed property company assets in continental Europe, according to the research, yield on average 3.2 percentage points more than 10-year benchmark bonds, which compares with the average 1.5 percentage point premium over the long term.
JP Morgan’s Tim Leckie concluded his presentation saying:
“The benign interest rate outlook means that with property yields still at a significant premium to benchmark interest rates, there is still scope for capital appreciation for real estate assets across Europe. This is particularly the case when there is rental growth to support these higher values. These conditions underpin why we see good value in Europe’s listed property sector, offering a potential 16% upside to investors.”
Low Interest Rates Benefit European Property – http://t.co/a3DcaQxiYW
— LandlordZONE (@LandlordZONE) September 23, 2015