War in Ukraine: the first blows to the economy and real estate

Financial and real estate markets develop in line with economic and monetary policy. The first and future consequences of the war in Ukraine were analyzed by Beatrice Gedge and Pierre Scheffler, senior advisors to the independent real estate research, research and forecasting center IEIF.

Since Covid-19, the financial and real estate markets have been largely affected by economic and monetary policies to contain the effects of health restrictions. Today, Russia’s invasion of Ukraine, the first cross-border war of aggression in Europe since 1945, has every chance of having a lasting impact on them.

New inflation dynamics

The current uncertainty risks, in particular, provoking precautionary savings on the part of households and a wait-and-see attitude towards investments on the part of companies, slowing down the velocity of money. A bottleneck in the supply of manufactured goods, falling purchasing power and cautious behavior could see household incomes and corporate profits shrink, impacting office jobs, takeovers and the solvency of private real estate agents.

Prior to the invasion of Ukraine, rising prices in Europe were mainly due to rising energy prices and post-pandemic supply chain tensions. Rising energy prices will intensify and inflation could experience a new dynamic that, if the pressure continues, could indeed trigger demands for wage compensation. A new fragmentation of world trade with the economic isolation of Russia can also only lead to a more intense inflationary regime.

Real interest rates should remain in negative territory or even fall further, which is a favorable configuration for real estate. In the medium term, everything will depend on the consolidation of inflation in economic chains. If this anchor is strong, the ECB’s reaction will be stronger and the normalization will happen faster than expected so far.

Rent rises due to stagflation

A scenario of economic slowdown in Europe, combined with high inflation, i.e. an episode of stagflation thus increases its likelihood unless a diplomatic solution is quickly found. During these periods of stagflation, rents rise through an indexation mechanism, but when faced with declining revenues, it is difficult to pass on these increases to tenants, except for companies that can bear the pressure of their costs. Prices.

In France, during the long period of stagflation caused by the oil shocks of 1973 and 1979, real estate performed well with positive real total returns driven by returns on capital, while real rental returns were negative. During this period of very high inflation, real long-term rates remained very negative at the very beginning of the period and then became very positive at the end of the period. The stagflation of the early 1990s did not favor real estate, but then it was a bursting real estate bubble. The other two periods of stagflation in France were short-lived. The global financial crisis, also related to real estate, has had a very negative impact on real estate. The Covid crisis, very violent and very short, had only a temporary effect.

According to the IEIF, listed real estate markets in Europe do not give any special signals. All segments, with the exception of trade, have been declining since the beginning of the year. Logistics and health fall the most.

Dynamics of listed real estate by segments in Europe since the beginning of the year

Moreover, the fragmentation of the real estate market during the Covid crisis is gradually being corrected by the convergence of the performance of various segments.