Cycles Don't Have All The Answers

Property researchers shouldn’t just rely on cyclical patterns when predicting where markets are heading next, proposed Andrew Burrell, Head of EMEA Forecasting and Economics at JLL, speaking at the seminar.  Today’s evidence points toward an orderly correction in European markets as the current cycle moves into its latter stages – there isn’t much sign of overbuilding or overborrowing as yet – but very low interest rates mean that we are moving through uncharted territory.  And we have to remember that no recent cycle has ended well.

Burrell suggested that the pattern of Continental European cycles has recently been very similar to that in the UK. However some markets now look more overvalued than others, and most of these are in the Eurozone rather than the UK – a distinctly different situation to that prevailing a couple of years back.

Speaking at the same event, Kiran Raichura, Capital Economics’ European Property Economist, agreed that “commercial property pricing is beginning to look frothy” in the majority of European markets.  Yet Capital Economics’ model expects values to keep on rising through 2017 and 2018, only falling back between 2019 and 2021.  The Eurozone recovery still has some QE-driven momentum left, and interest rates here are unlikely to rise before 2019.

In many cases European markets may indeed offer relatively good value compared to other global regions.  But “late cycle investing” means the need to pick markets carefully.   Greg Mansell, Head of Research Real Assets at AXA REIM, suggested a number of ways this might be achieved, such as identifying centres with the potential for growth in “knowledge capital,” as well a focus on logistics, hotel and healthcare markets.

The SPR and IPF hold this joint seminar on European property markets annually, asking topical questions such as where we are in the real estate cycle and where we should invest next.  The latest edition, on Property Cycles in Continental Europe, was held on 14 September.

Tim Horsey