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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.

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