Last week the ECB cut the official interest rate 10 basis points to 0.15% and the deposit rate for banks to -0.10%. The ECB said also that it would make initially up to euro 400 billion in cheap loans available to banks, provided they lend more to the private sector. Also, the central bank signalled its willingness to take further action. All in all, the ECB did not disappoint, but equity markets and currency markets were not impressed. On the other hand spreads in the government bond markets in the Eurozone decreased substantially. Evidently, the ECB policies should be favourable for risky assets, for equities but also for real estate and emerging market debt. 

In this Marketexpress we deal summarily with real estate.


Source: Bloomberg, ING IM (May 2014)

## Yield and improving fundamentals in real estate

The search for yield is clearly visible in the performance of the real estate sector in developed markets. Relative to global equities, it is only since December that the asset class has regained some ground. The downward trend in bond yields is a key driver favouring real estate. Indeed, in a period where yield has become a scarce and hence expensive asset, those assets that can still offer a high yield are most-wanted by investors. The relative attractiveness of the dividend yield of real estate is illustrated in the graph above.

## High yield but there is one caveat

The additional yield on real estate is 0.8% (US) to 3.5% (Japan) above the respective investment grade corporate bond yield. This is above the pre-crisis levels. However, there is one caveat; it is not a free lunch. Real estate dividend payments are cyclical and show even higher volatility than equity dividends. Indeed, one should not forget that real estate is a highly cyclical business, prone to bubbles and bursts. A higher risk premium is therefore warranted. 

Another factor that explains the high yield is the negative impact of disinflation/deflation on rental growth and hence dividend growth. Investors want compensation for this by requiring a higher initial yield. This may explain why in Japan yields have consistently been far above corporate bond and equity yields. However, for now the regaining economic activity is more important than the disinflation/deflation fear.

## Yield and improving fundamentals remain supportive as ample liquidity is chasing too few opportunities

Overall, real estate still offers a good combination of yield and improving fundamentals. We think these will remain supportive as ample liquidity is chasing too few opportunities. Risks are either deflation or a strong increase in bond yields. Currently we do not see these risks as high enough to change our positive outlook on real estate in general and European real estate in particular.