London—Mirroring recent headlines, ING’s latest “Investment Management Europe Report” suggests that the Greek debt crisis and the declining value of the euro will adversely affect property yields and threaten the recovery in the real estate market.
Historically, European property yields significantly exceeded the bond rate, which signaled investors to move into development. Yet real estate returns are anticipated to only slightly outperform the risk-free market rate in 2010 and 2011, the report states.
The weakening euro is shrinking real estate values and decreasing development. The cause of the currency’s decreased value is linked to the Greece debt crisis and the recent €750 billion recovery package issued by the International Monetary Fund and European Union.
The impact is greatly due to the Greek bond holdings of many large European financial institutions. The majority of the euro zone’s national banks hold significant amounts of the bonds, including French bank Societe Generale with $3.93 billion in Greek debt.
The euro experienced a 14-month low (1.2818 to the dollar) on May 5th after investors feared that the massive aid package would not be sufficient, and could undermine Europe’s fragile economic recovery.
Criticism for the euro’s declining value falls on several factors including the Greek debt crisis, European socioeconomic polices, and the European Central Bank.
The average amount spent on social security and public healthcare in Europe increased from 16 percent of gross domestic product in 1980 to 21 percent in 2005, compared with 15.9 percent in the United States. In France, the figure is the highest in Europe at 31 percent.
In addition, the president of the European Central Bank, Jean-Claude Trichet, faces scrutiny over his decision to purchase bonds from weak euro zone countries, including Greece.
The report states that the problems could be worse in some of the smaller economies in the euro zone including Greece, Portugal and Spain which economies rely heavily on the value of the euro.
“The coming quarters will show whether the rescue package is sufficient to have a lasting effect on confidence and if the countries under scrutiny will initiate the required fiscal discipline and reforms,” said Eugene Philips, Managing Director Research & Investment Strategies at ING REIM Europe. “If not, real estate markets in Europe might face renewed headwinds.”
Despite the negative outlook in the majority of the European real estate, certain markets continue to look attractive because of stable real estate demand including Prague, Paris, and Brussels, the report states.
Early signs of rent recovery in London and Paris have been slightly offset by the forecast for rent declines in most other major markets during 2010. The report predicts that recovery will not spread to other European cities until 2011.
Though the report states there are negative marketplace signals for most European real estate, the declining euro is anticipated to attract for foreign capital investors as attractive exchange rates offer higher yields for non-European developers.