Fall in government bond yields should turn investor interest to property

By Bridging Loan Directory -

The widening of the yield gap between government bonds and prime real estate in Europe is significantly enhancing the attractiveness of property for yield-driven investors seeking secure medium- to long-term income, according to a report from CBRE.

One of the legacies of the recent global financial market turmoil has been a fall in the yield on ‘safe’ government bonds, while, at the same time, the yield on prime real estate in Europe has been essentially stable.

Sharply lower government bond yields mean that, in terms of relative pricing between asset classes, real estate looks more attractive. CBRE believes that the market could see moves by long-term investors who are relatively insensitive to short-term liquidity to exploit this yield gap. In particular, CBRE expects this interest to be concentrated on the highest quality assets in Eurozone markets, as recent real estate capital value gains in the UK have gone some way to closing the record yield gap. In the Eurozone, despite some gains in capital value, the yield gap has increased further, making this a more attractive market for these investors.

At the end of the first quarter of 2011, the yield on 10-year German government bonds was relatively steady at around 3.3%. However, recent market turmoil has seen that fall below 2%. A similar trend is evident in the United Kingdom 10-year bond yield, which having reached 3.8% at the end of Q1, now stands at around 2.4%.

Over the same period, the yield on the best, or ‘prime’, European real estate has also fallen; however, this decline has been marginal, around 15 basis points at most. The result is that the yield gap (the difference between the two) has widened considerably. For the UK that gap is still below the peak that it reached in March 2009, but for the Eurozone the yield gap is now even higher than at that turning point in market sentiment.

Michael Haddock, Head of EMEA Capital Markets Research, CBRE, said:

“With the gap between real estate and government bond yields at a historically high level, this is a strong buy signal for real estate, particularly in the Eurozone. Long-term investors, who are able to look past the current uncertainty should therefore be using market volatility as an opportunity to buy prime real estate rather than paying for liquidity that they do not need in government bonds.”