As we reach the year end and start looking towards the new year, exchange rate fluctuations and tendencies seem to be the topic of the day.
I find that the financial press is dominated by the divergent thoughts of the Fed and the ECB. We are all primed that the dollar will get even stronger as interest rates are put up in the US and the euro continues to weaken as the ECB prints money.
These have huge effects on capital flows in our property markets. Indeed, this is looking like a good time for dollar investors to enter certain European core markets, creating further yield compression in some very frothy markets.
In my view, this will not happen in markets such as Madrid, which needs to produce an improvement in demand fundamentals to validate these elevated prices, or Paris, which is at a boiling point because the demand for yield from the domestic institutions far outstrips the availability of income-generating assets.
However, it will happen in Germany, with its low volatility and low capital values, which has had an ongoing export-led boom, and cities such as Hamburg, Munich and Berlin will attract much of this capital flow and yields will continue to be driven down.
Northern Italy, with its manufacturing strength, will also continue to thrive, as it starts to benefit from a weak euro providing opportunity for growth.
This can already be seen in retailers’ figures in shopping centres in locations where manufacturing is strong.
This quantitative easing, which is designed to bolster ailing growth in the EU, will make the stronger parts of Europe go from strength to strength as the extra stimulus kicks in.
As for the UK, the pound has continued to strengthen against the euro, making the property markets look less attractive for European investors. Core pricing in London has increased significantly due to the current imbalance of supply and demand. However, as rents reach historic peaks and as the Bank of England leans towards raising interest rates in the near future, this should put a floor on yields.
Much of the capital aimed at the UK has been looking into the regions for better opportunities and, of course, debt has followed, with loan demands exceeding, for the first time, lending in London as it follows the liquidity in the regions.
A warning though: if the pound continues to strengthen against the euro, then productivity, which is mostly present in the regions, will suffer, and that may have a negative impact on property. At the moment, retailers in the UK are having a good year as consumer confidence comes back, and that should bode well for shopping centres.
Interestingly, as the euro weakens, there has been a surge in purchases of second homes in southern Europe by non-euro-denominated buyers. But this is only the beginning.
Time to buy that second home, perhaps? It is looking cheaper by the month.
Aref Lahham is managing director and founding partner, Orion Capital Managers
