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.

19 October 2021

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.

16 September 2021

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

16 July 2021
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Scandi offices to prove more resilient than euro-zone

Timely activity indicators suggest that the Scandinavian economies are already on the gradual path to normality, which will provide support to occupier demand and, in turn, prime office rents this year.

NOK carnage; Danish rate hike!

The Norwegian krone has endured an extraordinary week and will be vulnerable to further falls until market sentiment improves. Nonetheless, if our forecast for oil prices to start to rise later this year proves accurate, this should provide some support. Meanwhile, having hiked interest rates this week to defend its currency peg, Denmark’s Nationalbank may have to hike again in the near future.

Taking stock of the policy responses so far

Following the raft of policy measures by Nordic central banks this week, the focus next week will be on what the SNB has up its sleeve. We have pencilled in a cut in the policy rate, to -1.00%. Other than this, the focus for investors will be on the latest virus numbers and any other unscheduled policy announcements.

Policy response to COVID-19 ramping up

The policy landscape has changed dramatically over recent weeks and is shifting by the hour. Amid a raft of announcements in recent days, Denmark has grasped the nettle by closing schools and universities in response to the spread of COVID-19, while the Swedish government has announced a new short-term work scheme as part of a broader fiscal response. This appears to be similar in nature to the policy of Kurzarbeit in Switzerland (aka, ‘short-time’ working), which has been the subject of a spike in internet searches in recent weeks.

Helsinki offices to outperform

Further falls in yields coupled with robust, albeit slowing, rental growth point to Helsinki offices outperforming the rest of the euro-zone and its Nordic peers for total returns.

11 March 2020
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