EXPO 2015: viewing the financial crash with hindsight

The last time I attended EXPO Real it was the immediate aftermath of one of the worst financial crashes in history. The atmosphere was ‘distinctly chilly’.

Real estate was at the heart of the banking sector’s troubles and the half-empty halls and stands echoed with the noise from TV screens, which cascaded the latest market news foreshadowing the severe market correction that followed over the course of the next-18 months.

Happily, the 2015 Expo Real promoted an altogether more positive atmosphere. Though I maintain that this optimism should be tempered with caution…

This was my first chance to sample Europe’s largest real estate trade fair in seven years and it was fascinating to contrast how far the market has travelled since the crisis.

While not quite as memorable as Lehman’s collapse, Expo Real 2015 was a more normal event with bustling halls, overflowing stands, endless meetings and hearty entertainment. While the recovery in Europe post-2008 has been sluggish and fragile, real estate revived much earlier than anyone could have expected and has prospered in an ultra-low interest rate environment.

Anxieties remain, though considerably more prosaic than seven years ago, when investors were concerned about capital losses, not returns. After several good years for real estate, yields are back to levels last seen just before the collapse of 2008. This led to much discussion about moving up the risk curve and the need to look outside traditional commercial asset classes. But this is a normal challenge for investors at this stage of the cycle.

In my view, the next 12 months will be highly significant for investors. The extent and speed of yield compression in the years since the global crisis has surprised most. It is clearly related to the ultra-cheap money policies pursued by the authorities since 2008, as much as underlying property performance.

But the environment is about to change.

While global upheaval has stayed the Federal Reserve’s hand, it is only a matter of time before the global rate cycle turns up again.

For European real estate, this implies only limited room for further yield shift and greater pressure on returns once market rates climb. Luckily for the region, the establishment of a sustainable economic recovery implies a revival in rental growth too, which will offset this impact. The shift from reliance on yield shift to rental growth is critical. If this transition is achieved, there are good reasons to expect that Expo 2016 will be just as successful as this year.

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