ECB's second rate cut expected to boost investment and market confidence

The news of a second cut to the European Central Bank’s policy rate is very welcome, keeping to the expected downward trajectory that will see continued gradual improvement in investment conditions over the coming months. 

 Direct material impacts in the short-term are likely to be limited, as financial markets have broadly priced-in these cuts already, with 5-year swap rates down to c.2.3% in the Eurozone and c.3.4% in the UK this week.  What will be impactful is the confidence this brings to the market as we move towards more neutral territory.  Inflation is now very much under control and back into a more normalised pattern within target ranges, and growth remains subdued across most of Europe. As such, we expect the cycle of cuts to continue through this year and next. 

Attention will shift next week to the US, where the Fed will likely begin it’s rate-cutting cycle, the only real question remaining whether this will be by 25bps or a more substantial 50bps reduction.  The Bank of England’s Monetary Policy Committee also meet next week, where a second cut of the year is a possibility. 

Overall the market is currently pricing cuts during 2024 of 50bps in the Eurozone, which are now in place, and 75bps in the UK.  Similar levels of reductions are likely to follow next year.

In recent weeks we have seen a notable change in conditions in the US, where inflation has cooled after greater persistence in the first half of the year, and labour markets have softened.  This has shifted the balance of probability back towards greater policy stimulus.  This will in turn give central banks in Europe more room to manoeuvre in tackling domestic conditions, without risking significant divergence from the US and the potential currency and inflationary impacts which could follow.

More consistent and transparent financial conditions mean that real estate asset pricing has now stabilised across most European markets and sectors.  While pockets of compression are emerging through the second half of this year, we are unlikely to see many significant changes in the short- to medium-term.  With yields now broadly stable and rental growth expected, buyers will become increasingly confident in deploying capital into European markets.

Investment volumes were more encouraging in the second quarter, and while a quiet summer may result in modest Q3 volumes, we are on track for our forecast improvement through the year as a whole, as the market trends back towards longer-term average activity.