All Articles

Bunds' limbo under the 1% mark….improving real estate’s relative value

Torsten Steiner

Thursday was a gloomy day for the Eurozone, with data revealing that the recovery has faltered, and might even be going backwards.

The Eurozone's largest economies, France and Germany, both performed worse than expected with German GDP contracting marginally and France seeing zero growth for a second quarter in succession. Italy, meanwhile, the Eurozone's third largest economy, also fell back into recession.

Of greater concern, inflation fell to a mere 0.4%, its lowest rate since 2009, raising the spectre of a deflationary spiral. Despite Germany’s essentially sound economy, the 10-year bond yield (bund) fell to a historic low, crossing below the 1.0% threshold on Thursday . UK bond yields have decoupled from the Eurozone and tend to be in sync with US treasury yields.

With risk free rates dwindling in the Eurozone and likely to remain low for an extended period, at least until the ECB can generate inflation, pressure on real estate yields will remain downwards. What certainly seems like very sharp pricing for assets in Germany and France, could therefore persist for some time, maybe even years. But investments at these yields still need rental growth to emerge at some point and this is not a foregone conclusion in some of the lacklustre economies. Capital values will come under pressure at some point, therefore understanding the fundamentals of real estate has never been more important.

Any assumptions made or opinions expressed are as of the dates specified or if none at the document date and may change as subsequent conditions vary. In particular, the document has been prepared by reference to current tax and legal considerations that may alter in the future. The document may contain "forward-looking" information or estimates that are not purely historical in nature. Such information may include, among other things, illustrative projections and forecasts. There is no guarantee that any projections or forecasts made will come to pass. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments. Past performance is no guarantee of future performance. The value of investments and the income from them may go down as well as up and are not guaranteed. Rates of exchange may cause the value of investments to go up or down. Any favourable tax treatment is subject to government legislation and as such may not be maintained. The valuation of property is generally a matter of valuer’s opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Nothing in this document is intended or should be construed as advice. The document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. TIAA Henderson Real Estate (TH Real Estate) is name under which Henderson Real Estate Asset Management Limited provides investment products and services. Issued by Henderson Real Estate Asset Management Limited (reg. no. 2137726), (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3BN) which is authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored.

Stefan Wundrak

Stefan Wundrak

Head of European Research

Stefan's biography