What’s going on here?
Investors have ditched Europe’s commercial property market, a breakup that could keep the sector in the dumps for a while.
What does this mean?
Europe’s commercial property market has been put through the wringer, with high interest rates weighing on the sector’s valuations. Naturally, then, investors have been ditching related funds and putting their cash into assets that are benefiting from rising rates instead. Case in point: investments in European commercial real estate were down 59% in the first half of this year versus the same period last year. That’s a problem: the lack of interest may force funds to sell off the property investments they own, which could force prices in the property market – already posting double-digit dips – down even further.
Source: MSCI
Why should I care?
For markets: It’s a hard-knock life.
It’s no wonder European property funds are trading for far less than they’re worth. Existing investors are jumping ship in case property prices drop again, and new rules in France and Germany that force traders to hold cash in funds for a set period of time are putting off any new would-be investors. And to make matters worse, the same rising rates that are depressing property prices are also making it more expensive to pay back debt – something property funds have buckets of.
Source: MSCI
The bigger picture: A long game of limbo.
The worry about interest rates isn’t necessarily how high they go, but how long they stay there. If rates stay high for a long time, a whole bunch of investments will end up winded. Stocks included, as high rates bring down company valuations and the value of their future earnings. So here’s the twist: European property could actually be a safer bet since its low demand and high risk has likely already been accounted for in investments’ prices, taking some of the guesswork out of the equation.
