Quantitative easing (QE) and low oil prices will counteract the negative effects of deflation and a potential departure of Greece from the euro, said the chief economist of one of Europe’s largest pension funds at ULI Europe’s annual conference in Paris.
Eric Chaney of AXA Group said that unprecedented central bank intervention and the economic fillip stemming from a recent fall in oil prices were positive for the European economy, and that the region’s real estate industry would benefit.
Referring to the announcement by the European Central Bank (ECB) in January that it would inject at least €1.1 trillion into the ailing Eurozone economy, Chaney said: “The ECB is smart to go in this direction. Quantitative easing will go beyond the original end date [set out by ECB president Draghi] of September 2016 to at least 2017.
“Deflation is hard to fight. Once deflation has started to permeate the expectations of companies and people on the street, it takes a long period of quantitative easing to get rid of it.”
Chaney also said: “We will live in a world of low rates for a long period of time; this may be good news for the real estate industry. The ECB will continue to bring down bond yields. German bond yields on a ten-year maturity will fall to zero—that would have been unimaginable six months ago. Bond yields will remain low for the next few years. Real estate has the advantage of the illiquidity premium,” he said.
The economist also outlined the global economic impact of the recent dip in oil prices, arguing that in some countries this had already had a positive effect.
“For the next three years we will have low oil prices, with deep consequences . . . but it will boost some economies.
“Russia, Iran, Nigeria, Brazil, and Mexico will go through hard times. However, big importers of oil—such as the U.S., Europe, and Asia—will benefit.”
The oil price drop has enabled India and Indonesia to cut fuel subsidies for consumers in recent months. Fitch Ratings has said that the falling cost of oil would help India’s gross domestic product (GDP) growth to increase to around 6.3 percent in the next fiscal year from 5.6 percent in the year to March.
“For oil importers in Asia, the growth engine of the world, this is good; it makes them in better shape,” said Chaney, adding: “It gives leeway to cut interest rates or adopt a looser exchange rate policy.”
However, Chaney said the euro crisis was “not over”: “The long-term sustainability of the euro area was not guaranteed. It boils down to the bargains made since the crisis.”
He warned that a potential debt default by Greece’s new left-wing government—which could cause an exit from the European currency—could have disastrous consequences.
“There would be contagion and panic in the market. If Greece receives debt relief, then others will ask for the same treatment. Ireland is not happy with the way it has been treated. Spain has done a lot of reforms and could view that as unfair. There will be political consequences,” said Chaney.
Russia’s Cloudy Outlook
Disagreeing with Chaney’s outlook, Sergey Riabokobylko, CEO and managing partner, Cushman & Wakefield Russia, said that real estate investors were wrong to change their perceptions of Russia in recent months.
Almost €5 billion was invested in Russian real estate in 2014—a 49 percent decrease from the previous year, according to Real Capital Analytics, as political instability and economic sanctions have changed sentiment toward the market.
Riabokobylko argued that the country’s investment potential remained. “We have several multinational companies in Russia that are world-leading in terms of revenues and profit. GDP growth figures mask extreme performance of some cities. And capital from China, Korea, and Asia is starting to enter the market.”
He added that the confidence of domestic real estate professionals remained strong. “The property market is seen by local investors as one of the few truly independent sectors of the economy, which is totally free from government interference. Even in tough times, the real estate market enjoys a disproportionate amount of attention and activity.”
Riabokobylko outlined the country’s abundance of legacy Soviet infrastructure as a key opportunity, as it needs to be made “fit for modern economic purposes.”
United States and Asia
The best opportunities in the United States center on emerging tech companies in 2015, as well as catering for the needs of the millennial generation, according to Lynn Thurber, chairman of LaSalle Investment Management and chairman of ULI.
“Tech has been a driver of growth, but places such as Silicon Valley are fully valued. So we want to invest in emerging tech markets and are looking at Minneapolis, Pittsburgh, and NOHO [North of Houston Street] in New York City. These strategies will provide good returns relative to the risk,” she said.
Medical offices, public storage, and garages would provide good income and weather the next downturn, added Thurber.
She said that capital flows would continue to support pricing in the United States, and that LaSalle was seeing strength across most sectors. “We’re seeing decreases in vacancy in every sector except for suburban offices. There are rental increases across all property sectors.”
Demand for better living environments, sustainability and quality, and differentiation were trends affecting the Chinese real estate market, reported Henry Cheng, Chongbang Group and chairman of ULI China.
“People say that there’s a lot of overbuilding in China and it is all the same. Going forward, quality and differentiation will become a key competitive advantage [for real estate players]. China’s president has been talking about the need to do this, and for the first time.”
