#560
Euro Turnaround Story

Eurozone house prices have risen for the first time in over a year, according to the FT, likely fueled by lower mortgage rates. Beginning in early 2022, demand for European property saw steep declines as European Central Bank rates steadily hiked in the effort to combat inflation. As those same rates were cut once in June, once in September and likely another time in November, house prices increased 1.3% year-on-year this quarter.

European property prices are still far from recovered. In Germany, one of the most hard-hit markets and Europe’s largest economy, housing prices are still 12% below their peak in 2022 and are still down 2.6% year-on-year even as they increased quarter-on-quarter. Despite this, property owners are starting to be back in favor with credit investors as bonds of European residential property companies are now seeing significant price increases. In particular, so-called “hybrid bonds” - a form of junior debt without a maturity date - are seeing some of the strongest recoveries against an improving macro backdrop. Globally, funds like Two Sigma are also preparing to fundraise for real estate focused funds.

Real estate bonds are an important component of European high-yield funds, and asset managers have found European property bonds becoming a consensus long in the market, even as many property managers are still suffering from conditions in the past year. Recovery across different European countries and regions is likely to happen at different paces and to different extents - somewhat akin to the EU’s motto: united in diversity.