Today, the invasion of Ukraine by Russia, the first cross-border war of aggression in Europe since 1945, has every chance of having a lasting influence on them. Extreme risks in the markets would be exacerbated.
Béatrice Guedj and Pierre Schoeffler, IEIF senior advisors deliver their analysis.
Economic growth, inflation and interest rates
The current uncertainty risks provoking a desire to accumulate precautionary savings on the part of households and a wait-and-see attitude towards investments on the part of companies, slowing down the speed of circulation of money. Between a bottleneck on the supply of manufactured goods, a drop in purchasing power and precautionary behaviour, household income and corporate profits could be reduced, which would weigh on office jobs, take-up and the real estate solvency of private agents
Before the invasion of Ukraine, the rise in prices in Europe was mainly linked to the increase in the price of energy and post-Covid tensions on supply chains. The rise in energy prices will intensify and inflation could experience a new dynamic which, if the pressures persist, could really trigger demands for wage compensation. The new fragmentation of world trade with the economic isolation of Russia can also only lead to a more intense inflation regime.
Real interest rates should remain in negative territory, or even fall further, which is a favorable configuration for real estate. In the medium term, everything will depend on the anchoring of inflation in the economic circuits. If this anchor is strong, the ECB's response will be stronger and normalization faster than expected so far.
Implications for real estate
The scenario of an economic slowdown in Europe coupled with high inflation, ie an episode of stagflation, therefore sees its probability increase if a diplomatic solution is not quickly found. During these periods of stagflation, rents are driven up by the indexation mechanism but faced with reduced incomes, it is difficult to pass on these increases to tenants, except to companies which are able to pass on the pressure of their costs. return on their selling prices.
In France, during the long period of stagflation caused by the oil shocks of 1973 and 1979, real estate performed well with a positive real overall performance driven by capital yields while real rental yields were negative. During this period of very high inflation, real long-term rates remained very negative at the very beginning of the period before becoming very positive at the end of the period. The stagflation of the early 1990s was not favorable to real estate, but it was then the bursting of a real estate bubble. The other two periods of stagflation in France were short-lived. The global financial crisis, also of real estate origin, has been very negative for real estate. The Covid crisis, very violent and very short, had only a temporary effect.
Listed real estate markets in Europe are not sending any particular signals. All of the segments, excluding trade, have been eroding since the start of the year. Logistics and health are the ones that are falling the most. (see graph)
More fundamentally, the fragmentation of the real estate market at work during the Covid crisis is slowly being corrected by a convergence of the performances of the different segments.