The current climate of low interest rates will be broadly supportive of European property values into 2020, according to fresh research.
In its latest sector forecast, rating agency Moody’s noted that alongside supportive low interest rates, property values will be driven by structural changes, such as e-commerce growth, with country-specific issues having much less of an impact in the next two to three years.
Despite slowing economic growth and very low property yields, continued low interest rates will prevent sector-wide property value and credit quality declines in the next 12-18 months, the rating agency added.
Property values will not fall uniformly across asset classes and countries as property yields widen, which is however unlikely to happen in the next 12 months.
"The credit quality of the European real estate companies we rate should remain broadly stable into 2020," said Oliver Schmitt, VP-Senior Credit Officer at Moody's.
"Our view remains that property values and investor sentiment exhibit late cycle characteristics, as rents in the main European cities are high by historic comparison, and property yields are at a record low, but low interest rate expectations clearly support property values."
Moody's expects the retail property sector to suffer the most widespread value declines, with even prime properties being affected by changing consumer behaviour, in particular the increasing popularity of e-commerce.
Falls in property values are unlikely to test covenants. Despite having increased debt against property value gains in recent years, companies have built up buffers to withstand value declines without the risk of breaching covenants.
Companies that can sell assets in highly liquid core European markets, such as Germany, France and the UK, will be better able to preserve credit quality through a potential downturn, Moody’s added.
“Still, the risk of a credit negative no-deal Brexit has increased. Brexit uncertainty will continue to dampen sentiment, reduce investment volumes and constrain demand in the UK commercial real estate sector.”
