Tuesday, April 10, 2007

Those who piled into commercial property risk a shock / UK

a fantastic article. how big must the bell be that rings to see the obvious............. ? same could be said about many other asset classes......

ein fantastischer artikel. man fragt sich manchmal wirklich was passieren muß um zu erkennen das irgendetwas aus dem ruder gelaufen ist..... das gleiche gilt für einige andere asset klassen.....


thanks to ww and charlie the tram!

.....I have no need of transatlantic comparisons. The key question can be simply put: is the UK commercial property market a bubble waiting to burst?

The commercial property market is simply that owned by businesses. It includes, obviously, offices, shops, factories and warehouses.
So this is big stuff. Even so, you might think it a bit remote from the concerns of the average Joe. But you'd be wrong. Over the past few years not only have pension funds and other investors piled money into commercial property but also there have been large amounts coming in from private individuals. Commercial property has been a very hot sector indeed.

Over the past three years commercial property prices on average have increased by 11pc, 13pc and 13pc. They have doubled over the past 10 years. And this is an average. The most successful category, retail warehouses, has seen increases of almost 160pc.

For anyone familiar with financial markets in general, and this one in particular, these numbers seem to scream trouble. What goes up does not necessarily go down but what goes up that fast usually does. And this market has a history of booms and busts. Between 1980 and 1989, for example, commercial property prices almost doubled. Yet in the subsequent three years they fell by 30pc......

...., growth can only come from rising rents, falling gilt yields or further compression of the spread between gilt yields and commercial property.

The first is the best hope but even that isn't great. After all, the economy will probably carry on growing steadily but unspectacularly for the next few years. There is a fair amount of unused commercial property available and commercial construction has been high. It is unlikely that rents will rise by much more than 3pc on average over the next five years and in the absence of any change in yields that would also give you an average annual capital gain of 3pc.

And on the yields it really is difficult to see where help could possibly come from. Lower gilt yields? They are already extremely low. Indeed, given that interest rates may have to rise further it is more likely that gilt yields will rise over coming months.

As for the spread over gilts, it is already negative, that is to say, investors get less of an income return from commercial property than they do from gilts - despite the much greater risks. Sheer weight of money might drive the spread even more negative in the coming months but that surely cannot last.

>compare this to the latest data from germany. yields on the bunds are close to 4%. no wonder that uk investors are dominating the german market ( foreigners bought 75%! of 2006 volume) http://tinyurl.com/2sk7qy

>vergleicht das mit deutschland. die bunds rentieren knapp bei 4%. kein wunder das die ausländer und besonders investoren aus uk das geschehen hier dominieren.

So what I see is a petering out of the boom in commercial property but no bust, at least as long as values are not carried much higher than they currently are.

Am I uneasy about this view? You bet. Markets do not usually produce a fantastic run of rising prices followed by a gentle descent to equilibrium, maintained as far as the eye can see.

The end of the good times usually brings some sort of nasty shock, not least because the final phases of the boom bring in dodgier investors, more heavily exposed and taking more risks.

Moreover, what has happened in this case has been classic investment market behaviour.

Investors are supposed to look forward but, since the future is so uncertain whereas the past is known, what most investors do in fact is to look back - and assume that the future will be like the past.
So when commercial property was in the doldrums they weren't interested, even though the yield was extraordinarily high. Then after a few years of amazing capital gains commercial property came to be regarded as an asset whose prices regularly rise by 10-12pc per annum.

So just as the theoretical, rational, forward-looking investor should have been becoming less enthusiastic, so the sentiment-driven, backward-looking, actual investor was becoming more enthusiastic. Ring a bell?

>big enough / groß genug?

Although some aspects of this story are property market specific, many are not. All those investors who think they have been geniuses for investing in this super asset class have in fact been taking part in the worldwide increase in risk appetite which has seen everything from real estate to emerging market equities to fine art and fine wine increase sharply in value.

As I have pointed out many times in this column, these dramatic increases have at their root the easy credit conditions that have prevailed for many years but which central banks have been withdrawing little by little.

>chart from british land (nr. 1 in uk and 2nd biggest in europe)

...This may not be a bubble as such, but I will tell you something: commercial property used to be regarded as risky but now investors seem to think that it is safe. They could be in for a shock.

disclosure: short us reits

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5 Comments:

Blogger Flagg707 said...

You hit on a couple of key points - while commercial property may not be in a bubble, per se (though that is open to dispute), we've seen pension funds and investors pile into the sector so that it now yields less than government bonds.

That will soon be corrected, if for no other reason than these money managers will be told by their computer programs to shift money over to gilts or bonds (if in the US). Should be interesting to see what happens to future returns, especially in light of what looks to be some serious overcapacity.

7:11 AM  
Blogger jmf said...

hi flagg

here is a ery good piece from russ winter on the us situation

http://wallstreetexaminer.com/blogs/winter/?p=611#more-611

7:33 AM  
Blogger regli said...

Excellent article and comments. Thanks!

8:33 PM  
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Anonymous Anonymous said...

huh.. really like this :))

3:52 PM  

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