The price of commodities like uranium may be a better long-term indicator of property market performance than traditional measures such as the construction cost index according to Zug-based institutional investment manager Empira Group.
The investment manager, which focuses on German-speaking Europe, analysed and compared a range of early indicators of property market behaviour across 14 European countries. These included classic economic data sets for real estate and macroeconomic parameters such as consumption, GDP and unemployment as well as specific indicators for raw materials, transport and energy.
Macroeconomic parameters revealed a high correlation to contemporary real estate markets, but less relevant as early indicators, Empira said.
Real estate market-based indicators, such as the number of building permits issued and the number of existing construction companies in a particular country, also provide a high correlation with the real estate economy both currently and with a two-year lead time.
However, unexpected parameters such as commodity prices like uranium, and the level of private consumption, can provide a better indication one or two years ahead. Such indicators can be even more accurate than real estate market-related indicators such as the construction cost index, the firm said.
“Institutional investors generally think and act with a very long-term horizon. Thus there is a need for long-term and early indicators in order to be able to reliably estimate performance and adjust one’s portfolio allocation and investment strategy in good time – both defensively and opportunistically. This is why we dedicated our study to consciously look beyond commonly used indicators,” explains Lahcen Knapp, CEO of the Empira Group.
Eleven indicators have strong two-year correlation
The study identifies eleven statistically relevant early indicators with high correlation values that allow forecasts on real estate markets with a lead time of two years including the classic parameters such as consumption, GDP, unemployment, total retail sales and employment. In addition, there is the number of building permits issued, the most important indicator overall, and rent indexes in terms of property market-based indicators.
But, somewhat surprisingly, the national construction cost index does not make it into the top group while the number of active construction companies, commodity prices, such as that of uranium, and the number of annual car registrations, can be more useful depending on the country under consideration.
None can be looked at in isolation though. “A reliable early warning system for real estate markets can only be achieved by combining different indicators,” said Prof Steffen Metzner, Empira’s head of research