Banks will push down Europe’s “artificially high” property prices as they demand a higher return on their equity, according to Peter Linneman, chief executive of US-based Equity International Properties.
Speaking at GRI’s Global Investors in European Real Estate conference in Paris, Linneman said that the effect of banks expecting higher returns had already been felt on prices in the US and was starting to happen in Europe.
“In the US, banks used to be happy with a 3% return. But we were all getting that, and it pushed up prices on property.
“Europe has artificially high property prices, as banks in Europe all put out a lot of money and are happy to take a minimum single digit return.”
He said that, as the euro and market deregulation spur the opening up of Europe’s capital markets, banks will be forced to seek a higher return on equity.
“If they want a higher return they will have to raise fees and margins,” he said.
This will restrict the availability of finance to execute property deals and push prices down, he argued.
Linneman added that Europe will attract more capital from mutual and pension funds which, in the US, had taken over from banks and life insurance companies as the main sources of money.
Linneman says that mutual funds want the “perception that the value attached is determined by independent means not appraisal.
“That is why real estate has been dressed up to be palatable – securitisation and going public, etc. Nobody goes public because it is fun or cheap.”
