Currency is not always the first consideration when selecting real estate investment strategies, but when the euro reaches parity with the US dollar for the first time in 20 years, it warrants a closer look, particularly when the challenges of rising energy costs, wider inflation and increasing benchmark interest rates are impacting all western markets.
I do not pretend to be a currency expert, but I am told by those in the know that currency exchange rates are all about current and anticipated interest rates, with capital swirling round the world looking for the best returns. With a European base rate of just 0.5%, this sets the tone for low returns and so a weak euro, but it also provides an opportunity for real estate investors.
The benchmark euro three-year interest rate swap is currently just a smidge over 2%, compared with 3.4% for the US dollar and 3.7% for the pound sterling. For the levered Islamic investor, who may also be US dollar-denominated, this provides a double win. Bolt on the ability to lock in a 5% appreciation of the euro against the US dollar in three years’ time and it looks even better. But let’s not forget the real estate markets themselves, and aren’t we all headed for recession?
Focusing on the office market as the largest component of the investment market, recent research from Savills paints a positive picture. Office lettings continue a strong recovery and are projected to reach the five-year average this year. As you’d imagine, with hybrid working having become well established, demand for flexible office space has seen considerable growth, as well as a continued flight to quality. With environmental legislation and tenant expectations rising, many markets are seeing both strong rental growth and rising vacancy rates, as secondary stock fails to find a home.
We at 90 North have already seen the repricing of assets in Europe, which we believe will become more established over the next quarter. Adding in typically inflation-linked annual rent reviews on leases, and a long-leased property to a secure tenant able to weather some economic uncertainty, might look like a smart move come exit in three to five years’ time.
My customary search of the IFN database could not identify any recent European real estate activity among Islamic investors, but I have a hunch that that is about to change.
Written by Philip Churchill, first published in Islamic Finance news Volume 19, Issue 38 dated 21st September 2022.