The recent rise in European government bond yields over the past few months, as well as upward shifts in the yields of other alternative assets, such as corporate bonds and equity dividends, might have given real estate investors pause for thought against a background of uncertainty in several real estate asset classes.
Research group Capital Economics issued a note underlining their view that the rises in bond yields are unlikely to have material implications for property yields. In their view, office and industrial yields will continue to edge downwards over the next year or two before seeing upward pressure after 2023.
According to the note's author, Amy Wood, there are a couple of reasons why the recent rises in bond yields might be temporary. Firstly, they've been driven by fears of rising inflation, rather than an expectation that the ECB has become more hawkish. And since recent increases in inflation have been driven by temporary factors, while economic activity remains weak, this shift is not expected to be permanent. Added to this, ECB policymakers have expressed concerns about the recent rise in bond yields and would likely step up their asset purchases if the sell-off in bond markets were to resume.
In any event, even with these increases, bond yields remain low by historic standards. "As such, property remains attractive to investors. Indeed, even with the rise in bond yields, valuations continue to suggest that most office markets are still fairly or undervalued.The exceptions are Prague, Athens, Oslo and Zurich", says the note.
Separately, Capital Economics issued a later note on Eurozone GDP growth, in which it revised downwards its forecast due to the resurgence of virus cases, slow pace of vaccination and extension of lockdowns. It now says the recovery is likely to be delayed until the third quarter this year and it thinks GDP will not regain its pre-pandemic level until the second half of 2022, with Germany reaching that milestone by Q1, followed by France, but Italy and Spain not until 2023.
Commenting on the vaccine rollout, the researchers see few grounds to expect the pace of the vaccination programme to accelerate soon. Even if there are no further supply problems or official communication gaffes, the share of the adult population which has been vaccinated is only likely to reach the 50%-mark by around July. (This is ahead of many countries in the world, the researchers remind us, but is a milestone that the UK has already passed, and which the US will reach in a matter of weeks.)
Revising its eurozone growth forecasts downwards, the Capital Economics team say they are now working on the assumption that the most economically-damaging restrictions are lifted during June and July. If this happens, activity should recover rapidly but only from Q3, whereas most other forecasters, including the ECB, appear to be assuming that the rebound is imminent. "Our forecasts now see annual GDP growth of 3% this year and 4.5% next year, rather than the 4% that we had anticipated for both years."
