Frankfurt Global Real Estate Trends, Brexit and Opportunities for 2016/2017 T
BREXIT & THE OUTLOOK FOR GLOBAL REAL ESTATE MARKETS The Base Case Outlook Is Pretty Boring & Benign Source: Oxford Economic Forecasting. -1 0 1 2 3 4 5 6 Major Market GDP Forecasts, 2016-2020, % PA. Pre Brexit Post Brexit Diff China is structurally slowing and rebalancing which is having an impact on the sustainable rate of growth in Singapore, Australia and Hong-Kong. Meanwhile Abenomics is fading in Japan. The growth rates in the USA and the better performing markets in the USA Eurozone are fairly similar. In all cases, growth is at or just below the trend rate of growth. No major market is forecast to experience a recession on the But Confidence In The Base Case Is Unusually Low WE LIVE IN A HIGHLY UNCERTAIN WORLD • Powerful deflationary forces • Elevated leverage • Massive central bank distortion of asset prices • Damaged banking system • Poor demographics • Heightened social division FORECASTING UNCERTAINTY • The OEF only assigns a 45% probability to the base case (historic average c60%) The Macro Demand Impact Of Brexit Is Marginal In Most Markets The UK’s major trading partners – Ireland and the Netherlands – are most affected. CEE markets are vulnerable to risk-sentiment changing due to their dependence on foreign funding of their current accounts. Also the CEE are recipients of EU FDI to which the UK is a large contributor. The Major Impact Has Been On Monetary Policy ForecastsCentral Bank Policy Rates, % - Eurozone, UK, Japan. UK - Apr UK - Jul EZ - Apr EZ - Jul Japan - Apr Japan - Jul 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 16 17 18 19 20 CCheap Sterling Is A VERY Powerful Automatic Stabilizer Source: Oxford Economic Forecasting. 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 15 16 17 18 19 20 Aussie Dollar, Euro & Sterli Manipulated Bond Yields Continue To Force Capital Into Real Estate The UK Economy Is Outperforming Admittedly Awful Expectations The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets European CRE Markets Are At Risk From Another Political Surprise Country Date Risk Spain June 26th 2016 Parliamentary elections could bring in a left-wing populist anti-austerity party promising Catalonia an independence referendum. This would severely undermine both the stability of the economy but the investment case of buying into a structurally reforming market. Czech Republic October 2016 Two rounds of Senatorial elections in a country notorious for its opposition to joining the Euro but very close links to the Germany. Italy TBD October 2016 A constitutional referendum mandating massive reform of the Senatorial system to enable the reformist Prime Minister Matteo Renzi to initiate badly needed structural reforms. A loss would be seen as bad for the economic outlook. If Renzi lost he would likely resign as PM. Germany TBD February 2017 Presidential elections – ceremonial role but as Austria showed this could still provide a valve for a protest vote with the far right Alternative For Germany (AfD) polling well. Netherlands By 15th March 2017 Parliamentary elections. Geert Wilders’ far right Freedom Party is vocally calling for a NEXIT referendum – immigration a key issue. France 23rd April & 11th June 2017 Presidential election. Marine le Pen’s far right National Front almost guaranteed to go through to the second-round run-off – the question is whether she could actually win. She will likely campaign on the promise of a FREXIT referendum. Hungary TBD April 2017 A further large majority for the far right President Victor Orban is expected. Orban has already said he is considering a referendum on leaving the Schengen Area rather than the EU as a whole, but free movement of labour is seen as a non-negotiable issue by the European Commission. Note Orban’s close ties to Putin. London Lost Its #2 Position To LA In H1 2016 Metro Areas With The Highest Deal Volume In H1 2016 – USD bn. Paris lost its top five spot after the GFC with investors continuing to doubt that structural reform is in sight. London has lost its #2 slot to LA for the first time since RCA started collecting data in 2006 The UK Was A Major, But Not The Only, Drag On Deals BREXIT Accelerates The UK Downturn We Were Already Expecting Central London Offices Facing The Perfect Storm? Peak pricing achieved A slowdown in growth? A 2018/19 supply glut Uncertainty associated with the EU Referendum Business rates revaluationCity Winners And A More General Flight To Quality The sensible choice [for businesses] is not to stay in a land that could leave Europe one day but to make a choice to invest long term in a land that will always stay in Europe City Winners And A More General Flight To Quality Sources: PMA, FT.com Valérie Pécresse President of Île-de-France region London is 10 times the size of Frankfurt, if just 1% of its business comes here [to Frankfurt], that would be a 10% increase for us Hubertus Vath President of Frankfurt’s financial industry organizationOr Does Europe Lose Out In General?