CEE investors to Get Out of Govt Bonds into Real Estate - Survey

Recent nervousness over a possible bubble in sovereign fixed income securities have prompted some investors to get out of government bonds and into real estate, a survey says.

The trend has been set by Norway’s sovereign wealth fund Norges and reports suggest others like JP Morgan, M&G Real Estate and the Canadian Pension Plan Investment Board (CPPIB) may soon follow suit, attracted by the gap in prime yields between bonds and property.

A short-term mild hardening of yields looks likely in core CEE markets, to be followed by a medium term softening in line with bonds some 18-24 months down the linel, according to a Colliers International’s research paper Mind The Gap.

With no dramatic changes in rents anticipated on the downside, prime office property continues to look a good bet and warrants the shifts in allocations being reported and realised.

“As for where the money goes in the future, that appears to depend on investors’ attitudes toward country risk and the availability of appropriately priced product”, commented Damian Harrington, Regional Director of Research for Colliers International in Eastern Europe.

“Increasingly, allocations are likely to be driven by the availability of appropriately priced product which are typically found in the larger markets. As pricing really tightens and product dries up, however, we are likely to see a shift into peripheral locations and secondary assets as investors move up the risk curve in search of value”.

Colliers paper looks at the implications of recent movements in ‘safe-haven’ government bond yields on the commercial property investment market and the sustainability of the superior yields and returns possible in commercial real estate over sovereign bonds in Central and Eastern Europe (CEE).

The report explains why government bond yields differ, shows how 10-year bond yields in CEE countries relate to benchmark German bonds, and compares German bond yields to CEE property yields.

It also asks are market pricing comparisons rational at all, and concludes that two conflicting forces appear to be at work with regard to prime yield pricing.

On the one hand increasing asset allocations to property looks set to continue as investors shift out of equities and bonds in search of lower volatility.

According to the paper this increase in the weight of money compared to a relatively illiquid supply of prime assets will harden real estate prices and ultimately shift money into secondary property assets and locations.

On the other hand, money switching out of safe-haven bonds (at all time pricing lows) coupled with increasing inflationary pressure in the general economy, should see bond rates continue to rise in the near future.

This has the adverse effect of increasing target returns, which will lead to a softening of prime yields in the medium term in order ‘to be rational’, the report says.

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