Welcome to the new Real Asset Insights daily newsletter. In our first week, we are focusing on five big themes which will shape the environment for real estate markets in 2019. We kick off with the macro picture.
1. Economic slowdown& monetary policy loosening
- UK: Slow and below-trend growth in the UK in 2019 and 2020, as Brexit uncertainty continues to weigh on sentiment, says Capital Economics. However, beneath this, the economy is well placed to benefit – if and when – the Brexit deadlock lifts. GPD forecasts for 2019 range from 1.2% to 2.2%, reflecting the uncertainty surrounding the exact terms and timing of EU withdrawal. Sober forecasts indicate volatility is likely in the short term, while the pound could move in either direction, says Colliers International. Morgan Stanley has penciled in two rate hikes in 2019 (May/November) to take the UK base rate to 1.25% by year-end. In addition, inflation pressures are likely to weigh on consumer finances.
- Eurozone: the bloc is still expected to grow at an above-trend rate in 2019 but moderating. Within the region, Spain, Ireland and the central European countries expected to see the fastest rates of growth, predicts CBRE. Italy’s problematic budget could cause problems, while Germany’seconomic slowdown last year adds weight to fears over broader eurozone slowdown.
- Interest rates: eurozone rates are expected to stay low over the next couple of years, predicts Capital Economics, which will support the relative value of real estate compared with fixed income assets, offsetting concerns over pricing. As a result, investment transactions are expected to remain relatively “healthy” in 2019 although “investors are likely to be more cautious about bidding yields down further”given downside risks to economic growth and rents.
- Reversal of QE: falling inflation and persistent high unemployment in some countries (Italy, Greece, Spain, etc), planned unwind of QE in the eurozone and rise in short term rates likely delayed. However, PGIM Real Estate reminds us that history suggests that monetary policy tightening will eventually be followed by slowing returns on real estate. “Tighter monetary conditions and a sustained – albeit gradual – increase in policy rates among major central banks point towards a continuation of the trend of slowing real estate returns in 2019 and beyond.”
- US: US-driven cyclical slowdown unlikely until 2021, but risks from emerging markets problems in 2019. CBRE says: “There are numerous risks to the outlook of which a US-driven cyclical slowdown is the biggest, but this is unlikely before 2021. It is also possible that the Chinese economy is slowing more dramatically than official statistics show and that this could dent growth in other countries.” UBS is also not predicting an imminent US recession.