Prospect of US ending stimulus could drag on Europe's commercial property market
European commercial property prices may fall as much as 5 per cent in response to last month's signals that the US Federal Reserve is likely to rein in its support for the economy later this year, real estate experts said.
Fed chief Ben Bernanke's declaration that it could end its programme of bond-buying next year was a watershed moment for financial markets grown used to a steady drip of support from central banks.
For European property markets it will slow what was already a patchy recovery as the sovereign debt crisis continues to depress business sentiment and tenant demand.
"Property is priced for sustained stimulus," said Jefferies analyst Mike Prew, who downgraded six British property stocks including British Land, Hammerson and Land Securities on Wednesday.
"Ending QE is like passing the baton to the last runner in an Olympic relay race and in this case it will be dropped."
One result of the Fed curbing its stimulus measures is rising bond yields, which means investors typically demand higher yields to own property, a riskier asset because it is slower and more expensive to buy and sell and risks vacancy.
Bond yields have already risen in Europe in anticipation of QE ending, although property yields take longer to follow suit as changes rely on valuers, a method based on more subjectivity and evidence of deals collected historically. Either way, small changes would have a big impact on prices.
An office block with rental income of €5 million (HK$50 million) at a yield of 5 per cent makes the building worth €100 million. At a yield of 6 per cent, it is only worth €83 million.
At a time when most of Europe's major economies are either in recession or still struggling to get back to healthier growth, rental prices for offices, shops and warehouses are unlikely to rise in the near future, making a boost for property values from that side unlikely.
Prew forecasts UK property yields will rise 25 basis points, giving an average 3 per cent fall in prices over the next year if rents stay flat, versus the 3 per cent rise he forecast at the start of 2013.
Chris Simmons, founder of research company Real Estate Forecasting, expects a similar rise in Europe, which means a 5 per cent fall based on a 5 per cent yield and countries with weaker economies and rental demand like Spain and France at most risk, he said.
European commercial rents are lagging compared to other parts of the world.
There was no European city in the top 15 locations for annual rises in office occupancy costs, a measure largely driven by rents, in the first quarter of this year, according to data from property consultant CBRE.