Whether the current economic cycle has peaked was a constant question at the 2018 ULI Europe Conference in Berlin. In the discussions at the event in late January, real estate and investment experts were feeling bullish on Asia, generally enthusiastic about continental Europe, while cautious about Brexit.
Many companies are enjoying the upturn while it lasts and finally activating hiring and expansion plans that had been on hold during years of uncertainty. “I don’t think the peak has come yet, at least for the Eurozone,” said Maxime Alimi, head of investment strategy for AXA in France. He expects growth to be closer to 3 percent than 2 percent. “We expect the best year since the global financial crisis.” Strategist Michael Power of Investec Asset Management, on the other hand, believes we’re near the top of the cycle in the West, but growth is just getting started in the East.
People are expecting a natural slowdown after nine years of expansion, but economies do not die of old age like humans, said Alimi. The question is what shock could push the economy off its growth path. “I don’t see any shock, at least not in the next 12 to 18 months,” he said. He predicts that the global appetite for quantitative easing will peak this year, and noted the uncertainty of two key central bankers being replaced this year in Japan and the United States.
China has contributed a third of global growth in the past ten years, making the world economy very dependent on a still-emerging market, said Alimi. Growth in China is being driven by high levels of debt and loose trading practices, Power said, and he was emphatic in his attention to growth in Asia, which is spreading to Vietnam, Bangladesh, and India. More institutional investors are focusing on real estate as assets in Asia, particularly in infrastructure projects such as ports.
In Japan, a number of major public funds have not invested in real estate—until now, says Shuji Tomikawa, president of Mitsui Fudosan Investment Advisors. Three public funds with more than $4 trillion in assets will begin allocating 1 to 5 percent of their resources in real estate very soon. Their entry into the market could put even more pressure on prices in Europe.
What surprises Tomikawa most about the market in the United Kingdom and European Union is the liquidity. In Japan, institutional investors may expect to hold onto a property forever, whereas in Europe often property managers force fund managers to sell after 70 or 80 years. “That liquidity is a very attractive characteristic compared to Japan or China,” he said.
Paul Brundage, executive vice president and senior managing director of Oxford Properties Europe, the investing arm of a Canadian pension fund, is long on world cities including Berlin, where his company purchased the Sony Center in October for nearly €1.1 billion (US$1.3 billion), nearly double what a South Korean pension fund paid for it in 2010. Oxford Properties aims to have €5 billion (US$6.2 billion) in assets on the continent by 2020, making the Sony Center a major focus of its portfolio. “We believe there’s a growth story in Berlin that’s already started,” Brundage said.
Another question that arose multiple times at the conference was whether debt is too cheap. Would it be better for the economy if debt were more expensive? Brundage doesn’t think so. “The market is working, and that’s good,” he said.
In Europe, Brexit is causing uncertainty but not scaring off investors entirely. After 20 years of not investing there, Tomikawa’s firm started increasing its exposure in the United Kingdom and the European Union again six years ago, and then Brexit happened. But investors in Japan are attracted to mature, established, liquid markets, which the United Kingdom remains, so Brexit may not matter that much.
Brundage, the first non-British president of the British Property Federation, feels that Brexit is going to be messy. “It’s a fundamental change, it’s not a cycle,” he said. “And there’s no answer at the moment.” His company has not made an investment in the United Kingdom since before Brexit, and since then the company has taken £2 billion (US$2.8 billion) out of the United Kingdom and moved it into France and Germany. But “I think the sun will come up, and there will be opportunities,” he said, especially in the residential and logistics sectors. And despite Brexit’s threat to London City, their properties are full with waiting lists.
Barbara Knoflach, deputy CEO of BNP Paribas Real Estate, said that she is watching Italy closely. “If banks are opening up their pipelines for more lending in Italy, that boosts the markets,” she said. “Continental investors tend to be cautious on high leverage.”
Alimi wrapped up with these cautions: A decade of low interest rates has created imbalances and vulnerabilities in the world economy. When this cycle ends, structural issues such as unfunded pension liabilities, high levels of youth unemployment, and economic imbalances will resurface. We need to watch out for economic optimism morphing into market euphoria, and we know very little about the market impact of an exit from quantitative easing. But with the global economy experiencing its best year since the financial crisis, opportunities are everywhere.
Videos from the ULI Europe Conference: