Out of the Woods?

Three months ago, the economic gloom was unremitting, with the Eurozone teetering on the brink and growth expectations for 2012 being downgraded by the day. At that time, we felt that prime property would remain robust to the downturn, but warned of the risks if the situation deteriorated. Our forecast is currently being reconsidered, so it is interesting to review developments.

Has anything changed since the darkest days of last autumn? In short, yes. The Eurozone crisis appears to have stabilised and there are tentative signs that business sentiment is rebuilding. Equity markets have recovered their poise and, perhaps more importantly, are showing a clear revival in risk appetite by investors.

Economic news has been mixed, but highlights some bright spots. A drop in output was the norm for European economies (including the UK) in late 2011, as expected. But beyond, there is once again real hope for recovery. This is most apparent in the US where a run of good labour market statistics have brought a decided more upbeat outlook.

All good news! But the key uncertainty for EMEA property markets remains the Eurozone and the question remains, “is the worst of the debt crisis over”? Last week saw another EU summit come and go with another deal to end the crisis. It was notable for the optimistic tone of the comments made by the politicians.

But have they removed the immediate danger to the global economy? The ECB’s emergency loans have probably averted another credit crunch in Europe and markets have held fire over recent weeks. But, the EU’s weakest banks are on life support; Greece’s latest deal is on a knife-edge; Portugal is looking like a slow-motion replay; and there is still no firewall to protect Spain and Italy. So the underlying situation is no worse than in late 2011, but neither is it decisively better.

On balance, our view is that we can start to become cautiously optimistic and think about upside for real estate again. But it is still far too early to call an end to the danger in the Eurozone. With no measures planned to tackle the most severe problems, there could be an escalation at any time. As long as this remains a possibility, any uplift to our forecasts is likely to be balanced by concerns about the downside risks.