The too long accommodating monetary policies have been artificially maintaining, if not inflating, real and fixed income assets values, notably bonds and properties.These policies have also had the unattended consequence of enabling sub-performing economies to delay structural reforms crucial for their stabilization and long term growth.
The results of the Italian referendum will open a new wave of uncertainty for the European and global financial markets. The too long accommodating monetary policies have been artificially maintaining, if not inflating, real and fixed income assets values, notably bonds and properties. These policies have also had the unattended consequence of enabling sub-performing economies to delay structural reforms crucial for their stabilization and long term growth. As a direct consequence, we can see today the political risk becoming a key factor of global economic trends through the rise of populism, protectionism and separatism ideas in developed economies.
In the context of an increasing global financial instability, of a bond market potential crash and political tensions that makes the end of the Euro a plausible scenario, what can we predict as regards to short and midterm interest rates? Can the economic and monetary policy gap between the US and EU be favorable to the latter? Does this situation give credential to a new financial crisis scenario, triggering another credit crunch?
The next year will see numerous risky political events unfold, and we believe the good news regarding rates and liquidity may be over. Already we can observe a shift in the long term rates curve, 5-year swap having increased by 20 bps in a month (1).
In such a context, it is unlikely that the rental growth, should it last, could compensate the effects of the rise of financing costs. The current property values are hence likely to correct negatively in correlation with the readjustment pace, which should affect notably banking covenants. The non-stabilized assets, waiting for leasing events or capex will need to be refinanced in the short term, if not may be subject to degraded business plans in case of the above scenario becoming a reality.
Already, we notice palpable market signs of tensions regarding “non-core” assets. On the lender side through a tightening of the term sheets conditions, up to bank committee rejections events not seen since the last crisis, but also through the increase questioning of our real estate operator clients’ more and more aware of this situation.