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Portugal

Rising interest rates to speed up property correction

The weaker economic outlook and larger increases in interest rates are expected to weigh on property performance. With valuations under increasing pressure from sharply rising bond yields, we think that property yields will reach their troughs this year and rise by a cumulative 35bps at the all-property level over the following few years. Rental growth is unlikely to be able to provide much offset to prevent falls in capital values in 2023-24, with structural changes dragging on the retail and office sectors. This will leave annual total returns languishing in low single digits on average over the forecast. Beyond 2022, we think retail will overtake industrial as the best performing sector, while offices are expected to underperform.

23 June 2022

Portugal rebound to continue after election

The Socialist Party’s victory in yesterday’s election means there will be no substantial change in economic policy, but the government should be more stable. In any case, Portugal’s economy is set to grow rapidly this year, from a fairly low base, as the tourism sector recovers. Euro-zone Drop-In: Why the ECB will be laying the groundwork for rate hikes in 2023. Join Andrew Kenningham and the Europe team for a discussion about their Q1 euro-zone Economic Outlook report on Tuesday, 1 Feb at 09:00 EST/14:00 GMT. Registration here.

31 January 2022

Inflation falling but rates may rise to zero

We expect consumption to rebound from the Omicron wave within a few weeks, lifting euro-zone GDP to its pre-pandemic level in the first half of the year. But GDP will remain below its pre-pandemic path for the foreseeable future. Meanwhile, more stable energy prices will cause headline inflation to come down sharply, but the lingering effects of the pandemic will prolong supply-chain problems and wage inflation is likely to rise. As a result core inflation will stay above the ECB’s 2% inflation target throughout 2022. And against that backdrop, the ECB will end its net asset purchases by December and prepare the ground to raise its deposit rate to zero by the end of 2023.

21 January 2022
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Rental recovery picks up pace

The recovery in euro-zone commercial property values picked up in Q3, supported by a small fall in yields and an improvement in the pace of rental growth. While retail rents held steady, the quarterly rise in both office and industrial rents was the largest since 2019 Q4. Demand for prime assets and low interest rates will continue to support the property sector. However, with economic activity expected to slow over the next six months or so, and the outlook for the retail and office sectors still clouded by structural change, we think that the property recovery will struggle to maintain its current pace.

Running into troubled waters

Supply chain problems will slow the recovery and keep inflation above target until around the middle of next year. Beyond that, however, the economy should get back on track. After regaining its pre-crisis level later this year, output is likely to converge with its pre-pandemic trend. Meanwhile, we do not expect significant second-round effects from the recent surge in prices and think wage increases will remain quite modest. Headline inflation is likely to drop back below the ECB’s target by the end of next year, as energy inflation turns negative. So while the ECB will end its emergency PEPP purchases next March, it will step up its regular asset purchases and leave the deposit rate at -0.5% until around 2025, which is a lot later than financial markets anticipate.

Wider market confirms recovery in prime data

The latest MSCI data show that the wider market has moved roughly in line with our prime data since the onset of the pandemic and provide support to our outlook for property values.

Headwinds strengthening

Supply shortages and rising energy prices are becoming stronger headwinds to the euro-zone recovery. The latest data from Germany showed sharp falls in industrial orders and production, with manufacturers citing supply bottlenecks as a constraint on output. These problems have hit the vehicle sector particularly hard, and in the September German Ifo survey more car producers expected conditions to deteriorate in the next six months than improve. Firms in the construction sector also seem to be struggling to source materials. Meanwhile, the recent huge increases in energy prices are adding to producers’ costs and at the same time pushing up consumer price inflation. While the timeliest business surveys remain consistent with the economy as a whole growing, and we think that supply problems will ease and energy prices fall next year, the risk of stagnation in the final months of this year is rising.

Sector fortunes to shift

While the Delta variant has slowed economic activity in other parts of the world, this has not yet been the case in the euro-zone, and we are cautiously optimistic that the bloc will continue to grow. This will support the property market upturn, albeit offices and retail face structural challenges that will limit the rental recovery. Stronger rental prospects for industrial mean we think that the sector has the most scope for yield compression in the near term, though strong demand for prime assets should allow office yields to edge a bit lower too. However, further increases in yields will make some retail assets look increasingly attractive by year-end, prompting small yield falls in the next few years. The upshot is that industrial is expected to outperform over the next couple of years, but stronger capital value growth beyond 2022 will result in retail returns emerging as the strongest.

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