German real estate investors remain wary of rate rises
Interest rates are top of real estate investors’ minds in Germany, although global cyclical pressures have reduced.
January 17, 2019Real Estate
Interest rate levels in Europe will be the most significant factor in determining the development of the German real estate market in 2019. That is according to Berlin Hyp’s latest ‘Trendbarometer’, published in December 2018, which assesses trends in the German real estate sector and is based on the views of around 320 real estate experts across the country. Interest rates also ranked as top factor in last year’s Trendbarometer survey, reflecting real estate investors’ continued anxieties that interest rates may be set to rise, impacting real estate yields.
However, in spite of investors’ fears, the favourable, low interest rate environment for real estate markets looks set to continue in Europe and globally in the near term, according to Richard Barkham, CBRE’s chief economist, and Neil Blake, CBRE’s global head of Forecasting and Analytics.
“Going into the fourth quarter of 2018, we seemed to be into an aggressive, upward cycle of interest rate rises - because of the heat in the economy - but it’s slackened,” says Barkham. “Short-term US Treasuries were at 2%, long-term bonds at 3%. In the modern world, that represents ‘tight’, although no one knows what ‘tight’ is exactly. What monetary authorities really want to do is keep rates neutral, neither tight nor loose, but clearly the Federal Reserve had tightened US rates more than they thought.”
“Interest rates are supposed to represent a kind of stable equilibrium, but they are always cyclical and a movable feast,” adds Blake. “Interest rates will move up with the economic cycle and down when the economy slows. What we saw in the US in 2018 was as much a cyclical change, not a structural shift to higher interest rates. ”
In December 2018, the US Federal Reserve did raise rates by 25 basis points to a range of 2.25% to 2.5%. However, at the same time, the Fed projected that it would raise rates just twice in 2019, down from a previous projection of three rises, amid political pressure from president Donald Trump not to slow the US economy by raising borrowing costs. Blake points out that there is now every possibility of a six-month pause in the Fed’s policy of pushing up short-term interest rates, while US 10-year bond rates have eased down since October 2018.
What is the new normal for interest rates?
A structural, ‘normalisation’ of interest rates over the next 5-10 years, to levels seen before the global financial crisis (GFC), would impact real estate investors. However, as Barkham says: “What people thought was normal pre-GFC doesn’t hold true anymore.”
Unlike most other forecasters, Barkham and Blake predict US long-term interest rates to increase to just 0.9% in 10 years’ time, less than the consensus forecast of 1.6% and much less than the 2.4% predicted under the the normalisation hypothesis. Their reasoning is based on a ‘global savings hypothesis’, set out in a September 2018 CBRE research paper, ‘What interest rate normalization means for global real estate investors’. They warn, however, that real estate is not recession-proof and expect a mild recession in 2020.
European rates in the longer term
If there is scope for rates and yields to rise more than elsewhere, in the longer term, it is in Germany. “We think that US long-term interest rates in 10-years’ time will not be that different today’s. However, Germany has experienced a flight to quality and there is scope for rates to rise in the longer term,” says Blake.
As for the UK, Blake observes: “An interesting point about the UK is that before Brexit, UK long-term interest rates used to track the US. Now they track the Eurozone more closely - which implies a downgrading of the UK’s longer term growth prospects.”
A significant date in the future direction of European interest rate policy is 1 November 2019, when a new president will succeed Mario Draghi as president of the European Central Bank. The choice of new ECB president has yet to be made, and is tied up with appointments to other key European positions, but possible candidates include the Bank of France governor Francois Villeroy de Galhau.
Interest rates and their impact on real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt, and at British & Irish GRI 2019 on 15-16 May in London.
However, in spite of investors’ fears, the favourable, low interest rate environment for real estate markets looks set to continue in Europe and globally in the near term, according to Richard Barkham, CBRE’s chief economist, and Neil Blake, CBRE’s global head of Forecasting and Analytics.
“Going into the fourth quarter of 2018, we seemed to be into an aggressive, upward cycle of interest rate rises - because of the heat in the economy - but it’s slackened,” says Barkham. “Short-term US Treasuries were at 2%, long-term bonds at 3%. In the modern world, that represents ‘tight’, although no one knows what ‘tight’ is exactly. What monetary authorities really want to do is keep rates neutral, neither tight nor loose, but clearly the Federal Reserve had tightened US rates more than they thought.”
“Interest rates are supposed to represent a kind of stable equilibrium, but they are always cyclical and a movable feast,” adds Blake. “Interest rates will move up with the economic cycle and down when the economy slows. What we saw in the US in 2018 was as much a cyclical change, not a structural shift to higher interest rates. ”
In December 2018, the US Federal Reserve did raise rates by 25 basis points to a range of 2.25% to 2.5%. However, at the same time, the Fed projected that it would raise rates just twice in 2019, down from a previous projection of three rises, amid political pressure from president Donald Trump not to slow the US economy by raising borrowing costs. Blake points out that there is now every possibility of a six-month pause in the Fed’s policy of pushing up short-term interest rates, while US 10-year bond rates have eased down since October 2018.
What is the new normal for interest rates?
A structural, ‘normalisation’ of interest rates over the next 5-10 years, to levels seen before the global financial crisis (GFC), would impact real estate investors. However, as Barkham says: “What people thought was normal pre-GFC doesn’t hold true anymore.”
Unlike most other forecasters, Barkham and Blake predict US long-term interest rates to increase to just 0.9% in 10 years’ time, less than the consensus forecast of 1.6% and much less than the 2.4% predicted under the the normalisation hypothesis. Their reasoning is based on a ‘global savings hypothesis’, set out in a September 2018 CBRE research paper, ‘What interest rate normalization means for global real estate investors’. They warn, however, that real estate is not recession-proof and expect a mild recession in 2020.
European rates in the longer term
If there is scope for rates and yields to rise more than elsewhere, in the longer term, it is in Germany. “We think that US long-term interest rates in 10-years’ time will not be that different today’s. However, Germany has experienced a flight to quality and there is scope for rates to rise in the longer term,” says Blake.
As for the UK, Blake observes: “An interesting point about the UK is that before Brexit, UK long-term interest rates used to track the US. Now they track the Eurozone more closely - which implies a downgrading of the UK’s longer term growth prospects.”
A significant date in the future direction of European interest rate policy is 1 November 2019, when a new president will succeed Mario Draghi as president of the European Central Bank. The choice of new ECB president has yet to be made, and is tied up with appointments to other key European positions, but possible candidates include the Bank of France governor Francois Villeroy de Galhau.
Interest rates and their impact on real estate markets will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt, and at British & Irish GRI 2019 on 15-16 May in London.