European Monetary Union

Citation

Damesick, P. (1999), "European Monetary Union", Property Management, Vol. 17 No. 1. https://doi.org/10.1108/pm.1999.11317aaa.001

European Monetary Union

EMU takes flight

By the time this is read 11 EU members will have embarked on the final stage of the historic adventure of EMU. Their exchange rates will be irrecoverably fixed, their interest rates set by the European Central Bank and the euro established as a unit of account. The UK looks on from the sidelines, with the growing feeling that, assuming the experiment works, it will be joining thesingle currency within perhaps only a few years. In the interim the UK economy will be managed to keep it on track for entry and UK businesses will have to learn quickly to live with the euro.

The impact of EMU on Europe's economies and financial markets remains uncertain in many respects, but undoubtedly will be large and complex. In the light of this, discussion of the implications for property markets has been strangely muted, at least in the UK. Yet property, alongside other business sectors, will be deeply affected by the changes that the euro brings in its wake.

Living with the euro

It must be expected in the UK that the euro will enter "by the back door" prior to membership. Siemens, for example, have announced they will require all their European suppliers to deal with them in euros, and other major companies are likely to adopt similar policies.

Property investors and managers must anticipate that some international tenants might extend this approach to property. How should the UK landlord respond to a German bank which says it would be happy to take a lease on a new City office development but wants to pay rent in euros? How should the exchange rate risk be handled? Are property management and accounting systems euro-compliant? Is there a competitive edge to be gained from offering a euro-compatible property service?

Property market impacts

The EU is not an ideal currency area due to economic differences between its members and labour market rigidities. The "one size" interest rate will not fit all, with the risk of divergent impacts producing asset price inflation in some markets and deflation in others.

Property market impacts of EMU are already discernible within Europe. In the buoyant Irish economy, for example, the expectation and now reality of lower interest rates have contributed to rampant property price inflation in the Dublin market. The Irish government no longer has any independent monetary policy to address this.

EMU will be a crucial catalyst for change in the economic geography of the EU, and hence in the pattern of demand for property. Price transparency and a more competitive environment will spur re-structuring and rationalisation in many business sectors. There is likely to be increased regional specialisation in particular sectors, with greater centralisation, for example, in banking and securities trading. Major corporates will need only one treasury department for their operations within Euroland.

There will be an increased drive towards pan-European organisation in production, marketing and distribution systems. Companies will increasingly rationalise product lines and concentrate the manufacture of individual lines in a few plants, often a single location, to serve the euro-zone market.

These sectoral and structural changes will produce a complex pattern of local winners and losers. Some cities and regions will enjoy above average growth and emerge as new "hot spots" of an increasingly integrated Euroland economy. Others will lose out. For example, second-tier financial centres, such as Brussels and Milan, will lose much of their foreign exchange trading and are likely to be hit by rationalisation in banking and corporate finance functions. The City of London will not be immune from the backwash effects of consolidation in EU banking and finance. Equally, the City should be well-placed to capitalise on its strengths to capture market share in Euro-related areas of growth in financial services.

Property investment in Euroland

EMU is generally expected to bring major changes to European financial and investment markets and these will extend to property. Structural change in the European investment industry is likely to mean:

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  A process of consolidation bringing fewer, bigger players.

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  A major boost to cross-border investment, within pan-European portfolio strategies.

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  Opportunities for new entrants.

The key factors helping to forge a more integrated investment market in property will be bond yield and interest rate convergence and the removal of currency risk. A number of consequences for property investment and finance in Euroland can be expected. For example, banks will be able to lend to property in different national markets in the EU in the same currency. Diversified portfolios of loans in euros might then be packaged for securitisation.

Further implications of EMU for property investment in Euroland could include:

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  The expected growth in the European corporate bond market could open up new and competitive sources of finance for property companies.

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  Increased cross-border investment and lending is likely.

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  New sector specialists in European property investment could appear, e.g. concentrating on major shopping centres or European leisure property. European property companies may thus become more like their US counterparts including more "focused investors" specialising in particular types or sectors of property.

As a by-product of a more integrated European property investment market, there could be an increased drive towards harmonisation in valuation practices and standards and in lease structures across the different national markets.

As developments in the Euroland investment market take shape, the position of the UK and its relative attraction to European property investors become interesting and somewhat uncertain. Outside the euro-zone, will the UK market's appeal to foreign investors be compromised? Or will it appear as a good investment hedge against the euro-zone markets? Does the prospect of UK entry and convergence with European interest rates make UK property an obvious yield play, with potential for values to follow the recent Irish example?

A key strategic issue for property

In the short term, practical issues arising from the introduction of the euro will loom large in business concerns. But we must also view the single currency as a major new force for change in the structure and operation of European property markets. As yet, its full significance is difficult to quantify but it will doubtless feature prominently on many strategic agendas in the property sector in the coming year and beyond.

Peter Damesick(Peter Damesick is a Partner and Head of Research & Consultancy at St Quintin, where he advises a range of clients in the areas of portfolio analysis, investment strategy, market forecasts and demand studies. Prior to joining St Quintin in 1998, Peter worked in management consultancy with Coopers & Lybrand and before that was a university lecturer for six years. He is the current Chair of the Society of Property Researchers).