Further value corrections to come as property out-priced

The main trends impacting the sector are non-property, external factors, Income Analytics’ co-founder & CEO Matt Richardson  pointed out when we caught up with him at EXPO Real recently. These are, notably, interest rates, central bank policy and political policy.

“I think they’re going to shape the future 18 to 24 months in terms of market pricing and what happens in both the debt and equity markets in property,” Richardson told Real Asset Insight’s Richard Betts.

“We’ve got further corrections to come in the commercial property space in terms of pricing,” he added.

He said there are two reasons, the first of which is the artificially low cap rates throughout the latest cycle, based on zero-interest rate policies.

“It simply doesn’t make a lot of sense to investors to come into the market when they can go into the 10-year bond market at 4.5 to 5% in the US.”

The second factor is competing asset classes. “The bond market looks very well priced compared to property at the moment. I think we’re going to see some more adjustments and this is going to be a challenge because there are also issues around FDI.”

Richardson referred to the two major sources of capital – the US and China – largely withdrawing from the markets.

“In the case of the US, if you can buy 10-year government bonds at 5% and prime Manhattan offices at 6.5% you’re not going to be buying European real estate at 4%, so it’s a pretty binary outlook for the market.”

He pointed out that the other side of the story is that we are at the point in the cycle where decisions, investment strategies and debt strategies are put together that will make the major returns through the next cycle.

“For all of us who are old enough to have been through multiple cycles, they always come out, they always recover in the same way. It just takes time and, at the moment, we’ve got a bit more ahead of us.”