Catella “Market Tracker” : Buying prices rise despite turnaround in interest rates

by Matthias Tomas , Managing Director Catella Property Valuation

If there is a mechanism in international real estate management, then it’s confidence in market cycles. Depression becomes widespread if the market hits rock bottom, but on the upward part of the cycle dynamism and confidence is on a never-ending upswing. Clichés? Naturally, because both in phases of upturn and downturn the market produces investors who need exactly this window of opportunity for their activities. That’s according to the textbook and the behaviour of economic players it describes.

Nevertheless, all upswings are unique and new situations and circumstances in companies frequently cause dynamic development. Let’s be honest, who isn’t basking in the current interest rate trend that has been going on for the last five years? In the short term we are rushing from record to record. But what is the long-term view? It appears that the interest rates are ever more becoming a pivotal point for forecasts of the years to come. As a result of a change in the interest rate landscape, outside capital is becoming more scarce, real estate prices are falling and thus the yields for real estate are increasing. Who hasn’t experienced this mechanism many times before, or if not, has learned about it in training?

CATELLA Research expects an improved situation by the end of 2015 on the European real estate markets in the 20 investment centres investigated. With the continued stabilisation of the European economy, the policy of cheap money will gradually be abandoned. The interest rates will slowly rise. However, so will investors’ demand for real estate at the same time. It will be seen that yields will continue to fall.

The reasons:

  •  The “mountain of liquidity” will only slowly become smaller.
  • This “recovery” will continue to be conditioned by a clear “no-risk doctrine”.

The aforementioned textbook development in interest rates does not necessarily lead, in our assessment, to increasing purchase yields on the European office markets. On the contrary, an investor in this phase therefore knowingly takes into account “relative” yield losses due to the higher interest costs and lower purchase yields. This is a clear signal that in the changed activity mix an investor foregoes an increase in yield during a period characterised as “premium for security”. The “journey” along the risk-yield curve will in our opinion not develop as strongly as was the case with the last market highpoint.

The world of real estate has dynamically changed in recent years. It may be that a similar development will occur in the theory lagging behind.

Testata giornalistica non registrata ai sensi dell’Art.3 bis del D.L. 18 maggio 2012, n. 63 convertito in Legge 16.07.2012 n°103

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